The document discusses the Six-Pack, Two-Pack and Fiscal Compact which introduced stricter fiscal rules for EU countries. It outlines the key provisions including medium-term budgetary objectives of -1% to balance of GDP, annual improvements of 0.5% of GDP to structural balance, and reducing excess debt by 1/20th annually. It also examines macroeconomic indicators for Ireland like growth, deficits, debt levels, and concludes that increased monitoring and enforcement aims to prevent future crises but may not solve the ongoing crisis.
2. What are they?
Six Pack:
• 5 Council Regulations and 1 Directive (In force)
Two Pack:
• 2 Council Regulations (In draft)
Fiscal Compact:
• Title III of the Treaty on Stability, Coordination and
Governance (In ratification)
3. EU Economic Policy
• Articles 120 to 126 of the Treaty on the Functioning of
the European Union (TFEU)- Part III Title VII Chapter I
• Maastricht Convergence Criteria:
The reference values referred to in [.] this Treaty are:
– 3% for the ratio of the planned or actual government
deficit to gross domestic product at market prices;
– 60% for the ratio of government debt to gross domestic
product at market prices.
4. The Stability and Growth Pact (1997)
Two Council Regulations were agreed in Dublin in early 1997 and
they set out the EU approach to fiscal management and how
it would operate in the common currency
1. The „Preventative‟ Arm
– Council Regulation 1466/1997
2. The „Corrective‟ Arm
– Council Regulation 1467/1997
5. The Balanced-Budget Rule
From the „Preventative‟ Arm (1997)
Countries shall set out:
(a) the medium-term objective for the budgetary position of
close to balance or in surplus and the adjustment path
towards this objective for the general government
surplus/deficit
7. Revised Balanced-Budget Rule
Council Regulation 1055/2005:
Taking these factors into account, for Member States that
have adopted the euro and for ERM2 Member States the
country-specific medium-term budgetary objectives shall
be specified within a defined range between – 1 % of GDP
and balance or surplus, in cyclically adjusted terms, net of
one-off and temporary measures.
8. Medium Term Budget Objectives
• “The underlying (structural) budget balance […] respects the
terms of the Stability and Growth Pact, and is consistent with a
medium-term objective of keeping the budget close to balance”
Ireland, Stability Programme Update, December 2005
• “There is an obligation to make annual improvements of 0.5
per cent of GDP towards structural balance after the excessive
deficit has been corrected.”
Ireland, Stability Programme Update, December 2009
• “In the Irish case, the findings suggest an MTO of -½ per cent
of GDP”
Ireland, Stability Programme Update, April 2010
9. The Structural Balance
The structural budget balance refers to the general
government cyclically adjusted balance adjusted for
once-off elements beyond the economic cycle.
The cyclically adjusted balance is the fiscal balance
adjusted for the effects of the economic cycle.
SB = B – CB – OOM
CB = a.OG
A measure of the difference between the actual
output of an economy and the potential
output it could achieve when it is most
efficient, or at full capacity.
10. Economic Growth
Growth in Irish Real GDP 1971 to 2010
.1
.05
0
-.05
-.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
11. Economic Growth
Growth in Irish Real GDP 1971 to 2010
.1
.05
0
-.05
-.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
12. Economic Growth
Growth in Irish Real GDP 1971 to 2010
.1
.05
0
-.05
-.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
13. Economic Growth
Growth in Irish Real GDP 1971 to 2010
.1
.05
0
-.05
-.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
14. Output Gaps
Deviations of actual GDP from potential GDP as a per cent of potential GDP
12
OECD
9 IMF
EC
6
3
0
-3
-6
1994 1997 2000 2003 2006 2009 2012
Source: CSO
15. Structural Balances
Structural Budget Balance, % GDP
5
0
-5
-10
IMF 2007
-15 IMF 2011
2002 2003 2004 2005 2006 2007 2008
Source: IMF, World Economic Outlook
16. Structural Balances
Structural Budget Balance, % GDP
5
0
-5
-10
IMF 2007
-15 IMF 2011
2002 2003 2004 2005 2006 2007 2008
Source: IMF, World Economic Outlook
18. Budget Deficits
Pattern of Budget Deficits under Structural Deficit Rule
.03
0
-.03
Deficit Structural Output Gap
-.06
0 5 10 15 20 25
19. Achieving the Structural Deficit Target
Council Regulation 1055/2011:
The Council, when assessing the adjustment path toward the
medium-term budgetary objective, shall examine if the
Member State concerned pursues the annual improvement
of its cyclically-adjusted balance, net of one-off and other
temporary measures, required to meet its medium-term
budgetary objective, with 0,5 % of GDP as a benchmark.
The Council shall take into account whether a higher
adjustment effort is made in economic good times,
whereas the effort may be more limited in economic bad
times.
20. The 60% of GDP Debt Limit
From Article 126 of the TFEU:
the ratio of government debt to gross domestic product exceeds
a reference value, unless the ratio is sufficiently
diminishing and approaching the reference value at a
satisfactory pace.
22. The Numerical Debt Reduction Benchmark
The Six Pack introduces numerical benchmark for what will we
deemed a “satisfactory pace” of debt reduction.
The is the “one-twentieth” rule:
Countries should reduce the excess of the debt ratio over the
reference value at an average of one-twentieth per year as a
minimum.
26. What is not in the Fiscal Compact?
1. Government Expenditure Rule:
- Council Regulation 1175/2011
2. Macroeconomic Imbalance Procedure:
- Council Regulation 1174/2011
- Council Regulation 1176/2011
27. Government Expenditure Rule
… “for Member States that have achieved their medium- term
budgetary objective, annual expenditure growth does not
exceed a reference medium-term rate of potential GDP
growth, unless the excess is matched by discretionary
revenue measures;”
29. Conclusion
• Six-Pack Directive:
– Put (some of) the SGP fiscal rules into national law
• Six-Pack Regulations:
– Increased monitoring of balanced-budget rule and increased
involvement with EDP countries to correct excessive deficits
– Allow entry to EDP because of non-reducing debt ratio (1/20th rule)
– Establish Macroeconomic Imbalance Procedure and Government
Expenditure Rule
• Two-Pack Regulations:
– Further increased monitoring and surveillance of EDP and „Programme‟
countries
– Establish „independent‟ fiscal council
• Fiscal Compact:
– Introduced because countries would not follow Germany and put „debt
brake‟ into national constitutions.
– Would the Fiscal Compact have prevented the crisis?
– Will the Fiscal Compact solve the crisis?