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Applied Economics
Publication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/raec20Fiscal, economic and financial vulnerabilities:implications for Euro area surveillance
Christian Kastrop, Sarah Ciaglia, Werner Ebert, Sibylle Stoßberg & Stefanie Wolff-Hamacher
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German Federal Ministry of Finance, D-10117 Berlin, GermanyPublished online: 29 Nov 2013.
To cite this article: Christian Kastrop, Sarah Ciaglia, Werner Ebert, Sibylle Stoßberg & Stefanie Wolff-Hamacher (2014) Fiscal,economic and financial vulnerabilities: implications for Euro area surveillance, Applied Economics, 46:6, 603-615To link to this article: http://dx.doi.org/10.1080/00036846.2013.861588PLEASE SCROLL DOWN FOR ARTICLE
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Vol.46,No.6,603–615,http://dx.doi.org/10.1080/00036846.2013.861588
Fiscal,economicandfinancial
vulnerabilities:implicationsforEuroareasurveillance
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 ChristianKastrop*,SarahCiaglia,WernerEbert,SibylleStoßbergandStefanieWolff-Hamacher
GermanFederalMinistryofFinance,D-10117Berlin,Germany
Soundpublicfinancesarenecessaryforthefunctioningandeconomicprosperityofacommoncurrencyunion.Thefinancial,economicandEuropeansovereigndebtcrisesrevealedthatfinancialstabilityandeconomicgrowthalsoserveasprerequisitesandthatallthreeinteractinthisrespect.ThishasmadeclearthatcontainingrelatedvulnerabilitiesandrisksinordertoeffectivelypreventseriouscrisesiscomplexandnotsufficientlyaddressedbythecurrentinstitutionalframeworkoftheEuroarea.Substantialinstitutionalshortcomingsarenowbeingaddressedbyreforms.However,inthisarticle,wearguethatfurtherinstitutionalreformsareneededinordertointegratevulnerabilityandriskanalysesintosurveillanceprocesses.Aboveall,weproposesettingupaninde-pendentexpertcouncilthatischargedwiththeevaluationofallsurveillanceprocesses.
Keywords:Euroarea;institutions;macro-prudentialsurveillance;fiscalpolicyJELClassification:E62;F36;F55;H77;H87
I.Introduction
Sustainablepublicfinancesandstablefinancialmarketscanbeseenasvitalpreconditionsforgrowth(Baumetal.,2012;KumarandWoo,2013).Thefinancial,economicandEuropeansovereigndebtcriseshaverevealedthatexistingEUsurveillanceprocesseswere–conceptuallyandinstitutionally–notcapableofdetectingandreducingfiscal,financialandrealeconomicvulnerabilitiesandrisksatanearlystage.Asaresult,internationalinstitutionsaredevelopingmethodstobettercapturesuchvulnerabilitiesandrisks1(seeIMF,2010;EC,2011;ECB,2012).Therecentlyimplementedmechanismstocopewiththecrisesaresupposedtorespondinanadhocmannertothecurrentchallengesasriskshavealreadymaterialized,andatthesametimeseektocorrectsevereinstitutionalflaws.
Inordertopreventfuturecrises,‘financialstability’2isgenerallydeemedtobeatthecentreofsurveillancepro-cesses,particularlysinceitissupposedtobethebasisforanyeconomicandfiscalactions.AstheECBputsit,
*Correspondingauthor.E-mail:Christian.Kastrop@bmf.bund.de1Weusetheterm‘vulnerability’todescribeacharacteristicshortcomingofaninstitution,actororsituationthatmaybeinherentorself-made.AbankhavingadisproportionalamountofsovereignbondsofcountryXisvulnerabletoX’sfinancialsituation.However,aslongasthiscountryrunssustainablepublicfinances,thebank’sliquidityandsolvencyriskswouldstillbelow.Hence,astheIMFsummarizes,avulnerabilityisa‘necessary,butnotasufficient,conditionforacrisis’(IMF,2010,p.8).Ariskthendescribestheextenttowhichavulnerabilitymaymaterializeunderspecificconditions,ase.g.X’spublicfinancessustainabilitydecreases(cf.ECB,2010,p.139).2AstheECB,weusetheterm‘financialstability’todescribea‘conditioninwhichthefinancialsystem–whichcomprisesfinancialintermediaries,marketsandmarketinfrastructures–iscapableofwithstandingshocksandtheunravellingoffinancialimbalances’(ECB,2012,p.5).
©2013Taylor&Francis603
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‘systemicrisk’is‘theriskthatfinancialinstabilitybecomessowidespreadthatitimpairsthefunctioningofafinancialsystemtothepointwhereeconomicgrowthandwelfaresuffermaterially’(ECB,2010,p.138).Hence,monitoringfocussesonthefinancialsystematamacro-levelwithrespecttomicro-levelfinancialsupervisionandmacroeconomicdevelopments.Wearguethattheimplica-tionsoffinancialstabilityandtherealeconomyonpublicfinancesalsoneedtobeconsidered.Theaimistointegratealloftheseaspectsinasurveillancemechanismcapturing‘systemicrisks’(BIS,FSBandIMF,2011,p.4).Also,someinstitutionalstepshavebeentaken,asforexamplethestrengtheningoftheFinancialStabilityBoard(FSB),theestablishmentoftheEuropeanSystemicRiskBoard(ESRB)andthefosteringofEuropeanfiscalandmacro-economicsurveillance.However,anintegratedframe-workanalysingfiscal,financialandrealeconomicvulnerabilitiesandriskscomprehensivelyfortheEuroareahasthusfarbeenmissing.Thisarticleaddressesthisgapbyproposingsomeinstitutionalreforms.WeaimatdetectingtowhatextentvulnerabilitiesandrisksarealreadyconsideredandwhatflawsneedtobeaddressedbyfurtherinstitutionalreformsintheEuroarea.Specifically,weasktowhatextentvulnerabilityandriskconceptscouldbeintegratedintheEuroareasurveillanceframeworktoimproveit.
Theremainderofthisarticleisorganizedasfollows.First,wereviewmethodstodetectvulnerabilitiesandrisksconsideredbytheIMF,theECandtheECB.Second,wepresentanoverviewofthecurrentfiscal,macroeconomicandmacro-prudentialsurveillanceprocessesintheEuroarea.Finally,wedevelopideasonhowtointegratevulner-abilityandriskanalysesintotheEuroareasurveillanceframework.Sincetheassessmentofvulnerabilitiesandriskshasbecomeincreasinglyimportantalsotothepoli-ticalsphere,wederiveourassessmentsandproposalsfromapolicy-orientedpointofview,whichisnecessarilymorepracticalandpoliticaleconomyorientedthananacademicone.
II.VulnerabilityConceptsandIndicatorsTheIMF’scontributiontotheIMF–FSBEarlyWarningExercise
Inreactiontothe2008/2009financialcrisisandattherequestoftheG20,theIMFandFSBcreatedanEarlyWarningExercise(EWE;IMF,2010).TheIMF’scontri-butiontotheEWEisbasedonbothqualitativeandquan-titativeanalyses.Initsquantitativeanalyses,theIMFusesavarietyofvariables,indicators,andmodelstomeasuremacroeconomicandfinancialvulnerabilitiesandrisksinindividualcountries(cf.Table1).Inordertoreachanoverallassessmentofacountry’svulnerabilities,theIMF
C.Kastropetal.
Table1.Variables,indicatorsandmodelsusedbytheIMF’sEWE
AEsEMs
Medium-termvariablesRealGDPgrowth✓Houseprices✓Stockprices✓Privatecredit
✓ConstructionsectorcontributiontoGDPgrowth✓FinancialsectorcontributiontoGDPgrowth✓
Near-termvariablesExternalsector
Reservecoverageofshort-termdebtandprojectedcurrentaccountdeficit✓✓Currentaccount/GDP✓✓Externaldebt/GDP
✓
✓Externaldebt/exportsofgoodsandservices✓Realexportgrowth
✓Realeffectiveexchangerateovervaluation✓CGERcurrentaccountnormdeviation✓PrivatesectorexternaldebtPublicsector
Generalgovernmentbalance/GDP✓✓Primarygap
✓
✓Generalgovernmentgrossdebt/GDP✓Publicdebtexposedtocurrencyrisk✓Publicdebtexposedtorolloverrisk✓Governmentrevenue,percentchange✓FinancialsectorInflation
✓✓Capitaladequacyratio(banks)✓✓Returnonassets(banks)
✓✓Nonperformingloans(in%oftotalloans)✓
✓AnnualchangeinprivatesectorcredittoGDPratio
✓Dummyforinstitutional/structuralweakness✓Bankcross-borderinflows(percentchange)✓Loan/depositsratio✓
Corporatesector
Black–Scholes–Mertondefaultprobability(corporate)
✓✓Returnonassets(corporate)✓✓Price/earningsratio(corporate)✓
✓Interestcoverageratio✓Debt/assets✓Householdsector
Housepriceacceleration✓✓
Stockpriceacceleration✓Householdliabilities/GDP
✓Interaction(householdliabilities)x(medium-termhousepriceincrease)✓Interaction(householdliabilities)x(housepriceacceleration
✓
Source:IMF(2010)
Notes:AEs:advancedeconomies;EMs:emergingeconomies.
usestheso-called‘signallingapproach’(Kaminskyetal.,1998;KaminskyandReinhart,1999).Inthisapproach,historicaldataisusedtodeterminecriticalthresholdvaluesforasetofvariablesthathaveinthepastbeen
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 Fiscal,economicandfinancialvulnerabilities
linkedtoanupcomingcrisissituation(cf.EC,2011,p.7).Vulnerabilitiescanbeidentifiedbycomparingthesethresholdvalueswithactualvalues.Themethodologyconsistsofthreesteps.First,pastcrisisepisodesareiden-tifiedbyapplyingasetofpredefinedcriteria.3Additionally,anumberofvariablesandindicatorsareselectedthataredeemedtohavebeenrelevantduringtheonsetofpastepisodesofthisparticulartypeofcrisis.Second,thresholdvaluesfortheseindicatorsaredeter-mined.4Third,thresholdvaluesarecomparedtoactualvalues.Anaggregatedindicatoriscalculatedforeachcountryforeverysector,andfinallyanoverallcountryvulnerabilityindicator.
SincetheEWEtriestocoverasmanyoftheIMF’smembersaspossible,datalimitationsrestrictthechoiceofvariablesandindicatorstoanalysevulnerabilitiesandrisksinindividualsectors.TheEWEisstillatanearlystageandwillbefurtherdeveloped.AnexampleofhowtheIMFfurtherdeepensitsanalysesisitsworkonfiscalvulnerabilities,andinparticulartheso-called‘RiskOctagon’(Cottarelli,2011,cf.Fig.1andTable2).This‘RiskOctagon’wasfurtheroperationalizedinthefollow-ingworksoftheIMF.5Onestrandofworkfocussedontheselectionofsuitablevariablesandindicators.Forexample,Baldaccietal.(2011a)haveextendedthelistofbasicfiscal
Table2.RiskoctagonaccordingtoCottarelli(2011)
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Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 Basicfiscalvariables
Short-andmedium-termtrends:
CyclicallyadjustedprimarybalanceGrossgovernmentdebt
DifferentialbetweeninterestrateonpublicdebtandthegrowthrateofGDP
Long-termtrendsinthefiscalvariables(belongingtothefirstdimension):
PensionspendingtrendsHealthcarespendingtrendsAssetandliabilitymanagement:MaturityofgovernmentdebtSovereignbondrollovers
Uncertaintyaroundthebaselineprojections(describedinthefirstthreedimensions)
Contingentliabilities(contractualobligationsand
noncontractualcommitmentssuchasthosearisingfromthefinancialsector)
Macroeconomicassumptions(growthrate,interestrate,exchangerate)
FiscalpolicydeviationsOtherfactorsNonfiscalvariables
CurrentaccountbalancePrivatedebt
MarketsentimentorriskappetiteSource:Cottarelli(2011).
Shocksaffecting thebaseline
Macro shocks
Contingentliabilities
Long-termfiscal trends
Shocksaffecting fiscal
policy
Nonfiscalvulnerabilities
Marketsentiment
A&Lmanagement
Projectedfiscal vari-ables usingbaselineassumptions
Basic fiscalvariables
Other factors
Fig.1.RiskoctagonaccordingtoCottarelli(2011)Source:Cottarelli(2011).
Thesecriteriavarydependingonthetypeofcrisisthatisatthecentreoftheanalysis.Forexample,inordertoidentifyafiscalcrisisinadvancedeconomies,Baldaccietal.(2011b)takeintoaccountfourcriteria:ahighyearlyinflationrate,theoccurrenceofpublicdebtdefaultorrestructuring,therealizationofalarge-scaleIMF-supportedprogrammeandalargedeviationofsovereignbondyieldspreads.4Twowaystoidentifythesethresholdsareusedintheliterature:oneistominimizetotalmisclassifiederrors,i.e.theweightedsumoffalsepositivecrisissignals(typeIerrors)andfalsenegativecrisissignals(typeIIerrors).Anotheristomaximizethesignal-to-noiseratio,i.e.theratioofthepercentageoftruepositivesignals(1–typeIIerrors)tothepercentageoffalsepositivesignals(typeIerrors)(cf.Baldaccietal.,2011b).5Cottarelli’s(2011)approachhasalsobeenusedintheIMFFiscalMonitorsasof2011;duetodatalimitations,however,thisapproachhassofaronlybeenappliedtocountrygroups,notindividualcountries.
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Table3.Fiscalmonitoringindicators
Basicfiscalvariables(short-andmedium-termfiscaldevelopments)
Generalgovernmentgross/netdebt(%GDP)
Cyclicallyadjustedprimarybalance(%potentialGDP)Projectedgrowth-adjustedinterestrate(r-g;5or10yearaverage)
Long-termfiscaltrends
Totalfertilityrate(deviationfrom2.1)Oldagedependencyrationprojections
Long-termprojectionsofpublicpensionexpenditure(%GDP)Long-termprojectionsofpublichealthexpenditure(%GDP)Assetandliabilitymanagement
Currentgrossfinancingneeds(%GDP)
Shareofshort-term(public)debtasaratiooftotal(public)debtDebtdenominatedinforeigncurrencies(%totaldebt)Debtheldbynonresidents(%totaldebt)
Weightedaveragematurityofoutstandinggeneralgovernmentdebt(years)
ForEMEsonly:Short-termexternaldebt(%grossinternationalreserves)
Source:Baldaccietal.(2011a).
C.Kastropetal.
developmentsdifferingfromthoseobservedforpreviouscrises.Whileitcanthusveryeffectivelyserveasafirst‘screening’inasurveillanceprocess,itshouldalwaysbeaccompaniedbyfurthersurveillancetools.TheEC’sreportonpublicfinancesinEMU
Inits2011reportonPublicFinancesinEMU,theECanalysespossibletoolstostrengthenitscapacitytodetectfiscaldistressinmemberstatesatanearlystageandtothereforecomplementitswell-establishedlong-termfiscalsustainabilityanalysis(EC,2011).8OneoftheapproachesoutlinedinthereportinvestigatesthepotentialimpactofthebalancesheetsituationofbanksonpublicfinancesbasedontheSYMBOLmodel(SYstemicModelofBankingOriginatedLosses).9SYMBOLwasdevelopedbytheECandateamofacademicexpertsonbankingregulationandisalreadyusedtoassesstheimpactofregulationpolicyproposalsaimedatincreasingfinancialmarketstability(cf.Campolongoetal.,2011).Themodelfollowsabottom-upapproach:Basedontheestimationofdefaultrisksofbankobligors,thedefaultprobabilityofindividualbanksandsubsequentlytheprobabilityofaggregateindividualbanklossesaredeterminedforeachcountry.Oncetheprobabilitydistributionoflossesofacountry’sbankingsystemasawholehasbeenestimated,thepossibleriskstopublicfinancesderivingfromtheselossesarededucted.Thisiscarriedoutundertheassump-tionthatthegovernmentwouldcoveralllossesthatneitherthebank’scapitalnortheexistingtoolsofthefinancialsafetynet,suchasdepositguaranteeschemes(DGSs)andbankresolutionfunds(BRFs),areabletoabsorb.Calculationsarecarriedoutfordifferentregula-toryframeworkscenarios10andanumberofsustainabilityindicatorsaredetermined.Oneoftheseindicatorslinksthisapproachtothelong-termfiscalsustainabilitymetho-dologyusedbytheECinitsSustainabilityReports(cf.EC,2009).Itistheprobabilitythatacountry’slong-termsustainabilitygap(S2indicator)11exceeds6%ofGDPduetolossesinthebankingsystemandthereforeclassifiesashighrisk(EC,2011).
Overall,theSYMBOLmodelcouldbeausefultooltocomplementtheEC’straditionaldebtsustainabilityassessmentwithafocusonaspecific,highlyrelevantriskfactor,i.e.thefinancialsector.Oneofitsbenefitsis
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 variablesandthenidentified13suitableones(cf.Table3).Schaechteretal.(2012)haveaddedfurthervariablesandindicatorsfromotherdimensionsoftheRiskOctagon.Inparticular,theyalsoconsidermacroeconomicshocksvis-à-visthebaselinescenarioandtheyincludemarket-basedriskvariablesandindicatorsaswellasindicatorsforspill-overrisks(cf.Table4).6Anotherstrandofworkfocussedonassessingtheoverallvulnerabilityofacountry.Inparticular,Baldaccietal.(2011b)proposethesignallingapproachasanappropriatemethod.7TheIMFhasthusdevelopedanumberofpotentiallyusefultoolsthatcouldalsobeusedforvulnerabilityandriskassessmentsintheEuroarea.Inparticular,thesignal-lingapproachcouldserveasamethodologicalframeworkofaEuroareaEarlyWarningSystem.Amajoradvantageofthisapproachisthatitsmethodologyisinternationallypractisedandrelativelyeasytohandle.However,therearealsoanumberofmethodologicaldrawbacks.First,itisneitherpossibletotestindividualvariablesfortheircon-ditionalstatisticalsignificancenortoaccountforcorrela-tionsbetweenvariables(cf.Baldaccietal.,2011b;EC,2011).Anothershortcomingisthattheanalysisisbasedonhistoricaldata.Afuturecrisismaybeprecededby
67TheIMFplanstoextendthis‘toolkit’toincludetheinvestorbasis,thecurrencyinwhichdebtisdenominatedandcontingentliabilities.Foradetaileddescriptionoftheunivariatesignallingapproachtoidentifyfiscalsustainabilityrisks,refertoBaldaccietal.(2011b).Comparedtoearlierworks,Baldaccietal.(2011a)usethebroaderdefinitionoffiscalcrisesintroducedbyCottarelli(2011).8Overall,fourapproachesarepresentedinthe2011reportonpublicfinancesinEMU.OnlytwowillbediscussedinthisarticleastheyarealreadyusedorplannedtobeusedbytheECforvulnerabilityassessment.9DetailsonthemethodologyarelaidoutinDeLisaetal.(2010).10Theregulatoryframeworkscenariosvarywithrespecttotheunderlyingcapitalrequirements,withrespecttowhetherdepositguaranteeschemesandbankresolutionfundsareinplacetoabsorbbankinglosses,whetherabail-inruleofbondholdersandnoncovereddepositorsexists,andwhethercontagioneffectsaretakenintoaccount(cf.EC,2011).11TheS2-Indicatorexpressesthe‘permanentadjustmentintheprimarybalancenecessarytomeettheintertemporalbudgetconstraintoveraninfinitehorizon’(EC,2009,p.34).
Fiscal,economicandfinancialvulnerabilities
Table4.ToolkitforassessingfiscalvulnerabilitiesinadvancedeconomiesaccordingtoSchaechteretal.(2012)
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Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 Short-termfinancingpressures
Grossfundingneeds(short±mediumterm)
Needforlargenewissuanceofdebttofinanceafiscaldeficit+needtorefinancelargeamountsofmaturingdebtCurrentstockofgeneralgovernmentdebt/averagedebtmaturityMarkets’perceptionofsovereigndefaultriskaCreditdefaultswap(CDS)spreadsRelativeassetswap(RAS)spreadsDistressdependenceamongsovereigns
probabilityofsovereigndistressinonecountrygivendefaultinanothercountryMedium-andlong-termpressures
Medium-andlong-termadjustmentneedstoensurefiscalsustainability
Cyclicallyadjustedprimarybalancethathastoberealizedby2020andmaintaineduntil2030toreachadebtlevelof60%ofGDPby2030bPrimarybalancein2016thatwouldbeconsistentwithstabilizingthedebtlevelintheverylongrun,inordertosatisfytheintertemporalbudgetconstraintInterestrate–growthdifferential
Growthshocks(e.g.realGDPgrowth–1ppcomparedtobaseline)Interestrateshocks(e.g.interestrates+100bpsoverthemediumterm)Stochasticsimulations:riskstopublicdebttrajectoriescSource:Schaechter,A.etal.(2012).
Notes:aTheIMFnotesthatcautionisneededwheninterpretinghigh-frequencyfinancialmarketindicatorslikeCDSandRASspreads.Inparticular,therisksmeasuredbytheseindicatorsdependnotonlyonfiscalvulnerabilitiesbutalsoonglobalandfinancialfactors.bIfthedebtlevelinthestartingyearislessthan60%ofGDP,thatlevelissetasthe2030-target.Forcountrieswithlargefinancialassetsnetdebttargetsareassumed.cThecomputationofpublicdebttrajectoriesreliesonarisk-basedapproachtodebtsustainability.
thatitsresultscanalsodirectlyfeedintothelong-termsustainabilityanalysisalreadycarriedoutbytheEC.However,severalissueswouldneedtobeaddressedbeforeimplementation,suchasquality,coverageandtimelinessoftheunderlyingdata.Furthermore,themodeldoesnotconsidertheimpactofdifferentmacro-economicscenariosandsomesimplifications,suchastheassumptionthatallbankassetsareloans,weakenthestrengthoftheresults(cf.EC,2011).
TheEC(2011)alsopresentsafiscalcrisisriskmodelbasedonthesignallingapproachandisconsideringincludingthemodelinitsupcomingSustainabilityReport2012inordertoassessrisksforshort-termfiscalsustainability.ThemethodologyismainlyadoptedfromrecentIMFresearchworkonassessingfiscalstress(cf.Baldaccietal.,2011b),butisadjustedtotheEuropeancontext.TheECchoosesanumberoffiscalvariables,buttakesonabroaderperspectivebyalsousingmacro-finan-cialvariables.Whencalculatingoptimalthresholds,theECanalysesthesamefourcriteriatoidentifyanepisodeoffiscaldistress.12Theauthorscalculatecross-countryresultsfortheindividualandthematiccompositeindica-tors(fiscalvs.financial-competitiveness)andacompositeindicatorofallvariables(cf.Table5).Overall,theEC’sconsiderationsshowthatthesignallingapproachcanbeusedflexiblywhensettingupanearlywarningsystem,
12adaptedtoaspecificregionalcontextandallowsforset-tingdifferentanalyticalpriorities.TheECB’sfinancialstabilityreview
TheECBisintenselyworkingon‘developingtoolsandmodelswhichcanbeusedtomonitor,identifyandassesspotentialthreatstothestabilityofthefinancialsystem’(ECB,2011a,p.141;seealsoECB,2011b,149ff.).Amongthese,theECB’sFinancialStabilityReviewisoneofthefewpublicallyavailablemacro-prudentialstu-dies.TheECBanalysesthecurrentstateoftheEuroarea’sfinancialstabilityanditsimpactonrealeconomicdevel-opments.Inafirststep,thereportanalyses‘macrorisks’(ECB,2012,15ff.),suchasinternationalfinancialspill-oversandgeographicalriskaccumulationsaswellasoilprices.Thefocusliesonassessingtrendsandtracingabroadpictureofthegeneralglobalfinancialsituation.Inordertoassessmacrorisks,theECBemploystwomodelsaimingatdetectingacountry’soraregion’scontributiontoglobalfinancialmarketstress.Inasecondstep,theECBanalyses‘creditrisks’(ECB,2012,27ff.)atthegloballevelinmoredetail.Creditdemandandsupplyforhouse-holdsandthecorporatesectoraswellaspublicfinancesandtherelatedmacroeconomicoutlookareatthecoreoftheanalysis.Then,theECBlooksatthefinancialsystemspecificallywithregardtotheEuroarea.Afterhaving
SomeminordifferencesexistasBaldaccietal.(2011b)setdifferentthresholdsforemergingandfordevelopedeconomieswithregardtotheinflationrate,whiletheEC(2009)approachonlyconsidersdevelopedeconomies.
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Table5.Variablesusedinthe2011ReportonPublicFinancesinEMUforthecompositionofthefiscalindexandthefinancial-competitivenessindex(EC,2011)
FiscalIndexBalance,%GDP
Primarybalance,%GDP
Cyclicallyadjustedbalance,%GDPStabilizingprimarybalance,%GDPGrossdebt,%GDP
Changeingrossdebt,%GDP
Short-termdebt,government,%GDPNetdebt,%GDP
Interestrate–growthdifferential
Changeinexpenditureofgeneralgovernment,%GDP
Changeinfinalconsumptionexpenditureofgeneralgovernment,%GDP
Old-agedependencyratio20yearsahead
Averageyearlychangeinprojectedage-relatedpublicexpenditureas%ofGDPoverthenext30yearsFinancial-competitivenessIndex
Netfinancialassets,totaleconomy,%GDPNetsavingsofhouseholds,%GDP
Netsavingsofnonfinancialcorporations,%GDPPrivatesectordebt,%GDP
Netacquisitionoffinancialassets,privatesector,%GDPLeverage,financialcorporations
Short-termdebt,nonfinancialcorp.,%GDPRealshort-terminterestrateConstruction,%valueaddedCurrentaccount,%GDP
Averagegrowthrateofrealeffectiveexchangerate,basedonexportsdeflator,ref.35countries
Averagegrowthrateofnominalunitlabourcostsoverthelast3years
RealGDPgrowth
GDPpercapitainPPP,%ofUSlevelSource:EC(2011).
C.Kastropetal.
focussesonfinancialmarketactorsandonlyconsiderspublicfinancesandtherealeconomywithregardtotheirimpactonthem.Amoredetailedanalysisofspecificproducts,especiallywithregardtotheirvolume,regionalandfinancialsectorrelateddispersion,mightbehelpfulingettingabroadviewonfinancialstability.
Inconclusion,eachofthethreeconceptsfollowsadifferentapproach.WhiletheIMFconsidersabroadrangeofvariablesinordertoissueearly-warningrecom-mendationsinitscontributiontotheEWE,theECspeci-ficallylooksatdifferentfiscalvulnerabilityassessmenttools.TheECBfocussesonfinancialstabilitywhileusingsomemacro-stress-testingmodelsandfinancialsta-bilityindicators.Whatismissingsofararesubstantivecontagionmodelsandadeeperintegrationofrealecon-omyandpublicfinancesdevelopmentsintotheanalysis.Also,theseapproachesshouldbeusedinsurveillanceprocessestoactuallypreventvulnerabilitiesandrisksfromincreasingandmaterializinginacrisis.
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 III.Fiscal,macroeconomicand
macro-prudentialsurveillanceprocessesintheEuroareaAlthoughfiscal,financialandrealeconomicdevelop-mentsarealreadysubjecttosupervisioninEurope(cf.Fig.2),theirsurveillanceisnotascomprehensiveasnecessarytopreventcrises.Mostimportantly,thedifferentbranchesarenotconsideredinaninterconnectedframe-work.Overthelastfewyears,economiccooperationinEuropehasbeenfostered,surveillanceofpublicfinancesintheEuroareahasbeenstrengthened,surveillanceoffinancialmarketshasbeenimprovedandamacro-pruden-tialsupervisorybodywasestablished.Takingstockofthesesurveillanceprocesses,wefocusongapsregardingtheidentificationofvulnerabilitiesandrisksandweiden-tifyelementsthatneedtobeimproved.13●FiscalsurveillancebytheStabilityandGrowthPact
(SGP)includingthecorrespondingsustainabilityanalyses,theEuropeanSemesterandtheFiscalCompact,
●EconomicsurveillancewithintheMacroeconomic
ImbalanceProcedure(MIP)and
●Macro-prudentialsurveillancebytheESRB.
tracedthisbroadpicture,thereportexaminesfinancialinstitutionsintheEuroareafocussingontheprofitability,liquidityandfundingstructureofLCBGs,banksandinsurancecompanies.Moreover,theirinter-linkageswitheachotheraswellassovereignandrealeconomyfundingareconsideredinordertoassesstherelatedsectoralandregionalresilienceofthesefinancialinstitutionsandthepossibleregional,sectoralorspill-overeffectswithinthefinancialsector.
IncontrasttothepresentedmethodsoftheIMFandtheEC,theECBmainlylooksatdescriptivestatisticsandonlyusessomeindicatorsandsimulations.Thereport
TheEuro-Plus-PactandtheEurope2020Strategywillnotbeconsideredherealthoughonemightalsomakeuseoftheselessinstitutionalizedprocessestoimprovesurveillanceofvulnerabilitiesandrisks.Moreover,wedonotconsidermicro-prudentialsuper-visoryagenciesandtheFSBasitisnotpartoftheEuroarealevelinstitutionalsetting.Also,wedonotconsiderfinancialsupportprogrammeagenciesastheyareclearlysupposedtobetemporary.Foranoverviewandgeneralassessmentoftherecentreformpackages,cf.KastropandEbert(2009,2012).
13Fiscal,economicandfinancialvulnerabilities
ThereformedSGP
Whenassessingthecurrentreformpackagelabelled‘SGP3.0’(cf.Fig.3),14itbecomesobviousthatmajorinstitu-tionalgapsregardingthemonitoringofvulnerabilitiesandriskshavenotbeenclosed,notevenbytheFiscalCompactsignedinMarch2012bytheHeadsofStateandGovernmentasaninternationaltreaty.However,thereissomeimprovementunderthenewSGPregime,asthepublicdebtreferencevalueof60%ofGDPisnowtrans-parentanditscomplianceisenforcedbysanctions.Countrieswithdebtlevelsabovethatthresholdneedtoreducethedifferencebetweentheactualdebtlevelandthe60%-referenceby1/20peryear.ThisrequirementisbackedbytheFiscalCompactobligingtheEUMemberStates(MS)toimplementthatruleintheirnationallaws.Nationallawscanbeappealedatacourtandarenotsubjecttopoliticallog-rolling,e.g.intheECOFINCouncil.Theprincipleofabalancedbudgethasbecomecompulsoryandwillbebackedbysanctionsoverthemediumterm.Aviolationofthereferencevalueoraninsufficientreductionofthedebtlevelleadstoanexces-sivedeficitprocedure(EDP)andmoreeasilytosanctions(seeFig.3).
609
BesidespoliticaleconomicamendmentsdesignedtoimprovecompliancewiththeSGP,thequestionisinwhichrespectthecriteriaforsoundpublicfinancesandtheassessmentbytheECandtheCouncilaresufficienttocapturevulnerabilitiesandrisks.Publicdebtasapast-relatedconceptsumsuphistoricaldeficitsandinthatrespectrevealsthevulnerabilityofpublicfinancestointerestratedevelopmentsonfinancialmarkets.ThathasbeenstressedbytheIMF(Schaechteretal.,2012)andcancurrentlyberecognizeddailyinhigh-debtEuroareacoun-tries’publicfinances.Thepublicdeficitasadynamicconceptindicatestheshort-termpublicfinancerecordofanMSatthepresentandintheverynearfutureandinthatrespectcapturespublicfinancerisksonlytoalimitedextent.
However,themonitoringoftheMaastrichtreferencevaluesperseisnotsufficienttoavoidcrises,i.e.thematerializationofrisks:itisinprinciplenotpossibletocaptureallrisksforpublicfinancesinthepublicbudgetsandfiscalplansinadeterministicmanner.Withaninher-entelementofuncertaintyinprojections,thedeficitanddebtschedulessubmittedbytheMSincorporaterisks,explicitlyorimplicitly,onlytoalimitedextent(risksstemmingfromtheeconomy,financialmarketsorpublic
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 Euro Area Surveillance Processes
Public Finances
Fiscal Compact
SGP
European Semester
Real Economy
MIPEuro-Plus-PactEurope 2020
Financial System
European System of Financial Supervision, ESFS
Micro-level
NaƟonal Supervisory
Agencies
EIOPAEBAESMAJoint CommiƩee of
ESAs
Macro-level
ESRBInternaƟonal Co-operaƟon: FSB
Financial Support Programmes (EFSF, EFSM, IMF, ESM)
SGP: Stability and Growth Pact; MIP: Macroeconomic lmbalance Procedure; EIOPA: European Insurance and OccupaƟonal Pensions Authority; EBA:European Banking Authority; ESMA: European SecuriƟes and Markets Authority; ESA: European Supervisory AuthoriƟes; ESRB: European SystemicRisk Board; FSB: Financial Stability Board
Fig.2.Euroareasurveillanceprocedures–institutionaloverviewSource:Owndesign.
‘Six-Pack’:Regulation(EU)No1173/2011;Regulation(EU)No1174/2011;Regulation(EU)No1175/2011;Regulation(EU)No1176/2011;CouncilRegulation(EU)No1177/2011;CouncilDirective2011/85/EU;‘FiscalCompact’:TreatyonStability,CoordinationandGovernance;‘EuropeanSemester’:ECOFIN-CouncilPressRelease13161/10,07/09/2010,Foradetailedassessmentcf.KastropandEbert(2012).
14610
New Fiscal and Economic Surveillance System
More effecƟve SGP
Besides the deficit criterion, the debt criterion becomes obligatory
Obligatory reducƟon of debt, by 1/20 per year of the difference between theactual debt level and the debt level criterion
Budget must be balanced or in surplus (over the business cycle), defecƟons can besancƟoned (although the deficit is below the 3%-criterion; ‘prevenƟve arm’)Euro area countries need to submit an interest free deposit 1 month aŌer theopening of an EDP (COM’s recommendaƟon can be rejected by the Council’s OM)Besides fees, the Council can cut off a country’s funding from EU funds
NaƟonal planning and reporƟng cycles synchronised; the MS’s budgets and policiesare reviewed over 6 months in order to idenƟfy emerging imbalances
New process to monitor and correct macroeconomic imbalances (focus on currentaccount balance), similar to SGP
C.Kastropetal.
EarlierQuickerMore complex
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 Europ. Semester
MIP
SGP: Stability and Growth Pact; MIP: Macroeconomic Imbalance Procedure
Fig.3.NewfiscalandeconomicsurveillancesystemintheEuroareaSource:Owndesign.
finances).Also,theyarerarelycalculatedinaprudentmanner,e.g.withrespecttopossiblespill-overeffectsfromtherealeconomy.ThisconceptuallackisnotlimitedtothenationalbudgetoftheindividualMemberStatebutisalsovalidfortheprojectionsoftheEC.NeithertheMSnortheECshowasufficientdegreeofprudencewhencalculatingGDPfiguresorpublicdeficits.Thatabsenceofaprudentcalculationnecessarilyincorporatesanelementofvulnerabilityofthepublicfinancesagainstnegativeshocksaspublicbudgetslackadequateroomforman-oeuvreincaseofrisksmaterializing.
Fromtheperspectiveofpoliticaleconomy,thesurveil-lanceframeworkshowssevereweaknessesastheobliga-tiontomakerisksexplicitisnotestablishedandbudgetarysurveillancelacksclearincentivestocalculate‘prudently’.AlthoughtheEuropeanSemesterstream-linedprocessesandgivestheECmoreindicativepowerinthenationalbudgetarycalculations,itisfarfromclearinwhichrespectrisksforpublicfinancesoftheindivi-dualMShavetobemadeexplicitorhowsafetymarginshavetobecalculatedintheprojections.TheoverrulingpoweroftheCouncilhasbeenreducedbythenewvotingrequirementofreversedqualifiedmajority;thustheECisnowinchargeofenhancingthepreventivemonitoringofnationalbudgetpolicies,e.g.byaskinganMStoresub-mitabudget.
Inthecorrectivearm(EDP),MemberStatesarerequiredtocommittodetailedconsolidationandadjustmentmea-sures,whichcontainelementsofprudenceagainstrisks,withcompliancebeingmonitoredbytheECandthe
MIP and the Excessive Imbalance Procedure (EIP)
Warning
Deepenedanalyses
COM analyses risksmore specifically,taking SGP reportsand ESRB
recommendaƟonsinto account
Result
In case of excessive imbalances:
EIP opening by COM and the ECOFIN CouncilCorrecƟve AcƟon Plan (CAP)
plan and implementaƟon is monitored byCOM and the ECOFIN Council
more than two defecƟons to the deadlinesor requirements will lead to sancƟons (SGP-like procedure)
Scoreboard:
idenƟfy countrieswhich indicatorvalues are higher orlower than the EUaverage; COM’sreport need to beapproved by theECOFIN Council
Fig.4.MacroeconomicsurveillanceandtheexcessiveimbalancesprocedureSource:Owndesign.
Fiscal,economicandfinancialvulnerabilities
Council.Assanctionsimposedonindividualstateswillbetriggeredinamore‘automated’way,theinstitutionalset-upshouldsubstantiallylimittheleewayforagenerousinter-pretationoftheprovisions.Nevertheless,asimilarbindingprocedureatanearlystage,wheretheriskofanegativefiscaltrackrecordcanbeavoided,isstillmissing.ThisiswhytheEuropeanHeadsofStateorGovernmentlaunchedtheFiscalCompact:buildinganinstitutional‘fortress’againstexactlythesepoliticaleconomyproblemsandasastepforwardtowardsafiscalunioninthespiritofastabilityunion.BasedonthemodelofGermany’sconstitutional‘debtbrake’,theEurocountriescommittedtoimplementarrangementsforbalancedbudgetsintheirnationallaws.Infuture,thecyclicallyadjusteddeficitisnotallowedtoexceed0.5%oftheGDP.Thisshouldensurebudgetsclosetobalancewhilefiscalpolicycanactcounter-cycli-callyandthusreduceeconomicvulnerabilities.
Takingalong-termperspective,themonitoringofrisksforfiscalsustainabilityispartlycoveredintheEUpro-cesses.Adetailedreportingframeworkhasbeendevel-opedbytheEconomicPolicyCommittee(EPC)oftheEUtogetherwiththeEC,andtheageingaspecthasbeenintroducedintothemedium-termobjective(MTO)frame-work.Thelong-termpressureonpublicfinancesisaddi-tionallytriggeredbyarecurringno-containingeffectineconomicupswings.WhatwasconceptuallycorrectedinGermanybytheintroductionofacyclicallyadjustedMTO(despitestillopenissues,cf.Ebert,2013)hasunfortu-natelynotbeenimplementedinEuropecredibly.TheestablishmentofMTOsandtheirstrictenforcementoverthecycleremaininawayunfinished.Theintegratedmacroeconomicsurveillance
UnsustainableeconomicdevelopmentsintheEuroareademonstratedthateconomicgovernanceinEuropecannotsolelyrelyonfiscalmonitoring.Aspartoftheso-called‘Six-pack’,theCounciltogetherwiththeECaddressedthatproblemanddevelopedanewprocessforpreventingandcorrectingmacroeconomicimbalances,takingupele-mentsoftheSGPinthedesignoftheMIP(seeFig.4).15ThenewsurveillanceandenforcementmechanismisbasedonArt.121.6oftheEUTreaty.Theprocessisframedandtriggeredbytheso-called‘alertmechanism’,whichaimsatdetectingpossiblyharmfulimbalancesandtheneedforpreventiveorcorrectiveactions.TheMIP’spreventivearmallowstheECandtheCounciltoadoptrecommendationsatanearlystage,beforeimbalancesbecomeexcessive.TheExcessiveImbalancesProcedureasthecorrectivearmcopeswiththeproblematiccases.AnAlertMechanismReportisdiscussedintheEurogrouporintheCouncilfollowedbycountry-specificin-depth
1516611
reviewsbytheECasonepartoftheintegratedsurveil-lanceundertheEuropeansemester.Atthecoreofthenewprocedureisascoreboardof10indicatorswiththresholdsindicatinginternalandexternaleconomicproblems(cf.Table6).Twoindicatorsaimatmonitoringexternalposi-tions,threecaptureeconomiccompetitivenessandthesubsequentfivereflectinternalimbalances(EC,2012).16Basedontheaverageofpastdata,anin-depthanalysisrevealsifimbalancesarepresentorlikelytooccur.
Theflawsoftheseprocessescanbeseeninthefactthatthemacroeconomicsurveillanceisbydefinitionback-wardlooking.Thereisnoexplicitfuture-orientedviewonmacroeconomicdevelopmentsalthoughthealertmechanismissupposedtodetectimbalancesthathaveaclearlong-termdimensionearlyenoughtocounteract.And,whilethescoreboardcoverseconomic,fiscalandfinancialsectordevelopments,thespill-oversbetweenthethreespheresaremostlyneglected.Furthermore,thereisnocommonunderstandingofhowthelinkbetweenfinancialandmacroeconomicissuesshouldbeaddressedbysurveillanceprocesses.Finally,wefaceaseriousimplementationgapas,despitethesevereeco-nomicturbulencesintheEuroarea,theMIPinitsfirstyeardidnotclassifyanycountryashavingexcessiveimbalances.SuchweakpoliticalpressureatthestartoftheprocedureraisesthequestionwhethertheMIPframe-worktrulyhasthenecessarybite.
Macro-prudentialsurveillance–theroleoftheESRBAccordingtotheregulationestablishingtheESRB,
[t]heESRB’staskshouldbetomonitorandassesssystemicriskinnormaltimesforthepurposeofmitigatingtheexposureofthesystemtotheriskoffailureofsystemiccomponentsandenhancingthefinancialsystem’sresiliencetoshocks.(Regulation(EU)No1092/2010,whereas(10))
Downloaded by [UNIVERSITY OF ADELAIDE LIBRARIES] at 22:48 08 December 2013 TheESRBanalysesthecurrentmacro-financialsituationandadvisesEuropeanandnationalbodiesonhowtofosterfinancialstabilityintheEU.TheBoardconsiderspublicfinancesandrealeconomicaspectsforthispurposeaswellasnegativeeffectsofthefinancialsystemontherealeconomy.TheESRBistheEU’smacro-prudentialsuper-visorybody.ItgathersEuropeanandnationalsupervisoryauthorities,centralbanks,theEC,theEuropeanSupervisoryAuthorities(ESAs)andtheEconomicandFinancialCommittee(EFC).TheECB’spresidentisalsotheChairoftheESRB.TheECBplaysastrongrolewithintheESRB,althoughtheESRBissupposedtoconsidernotonlytheEuroareabutthewholeEU.TheESRBisdesignedtoworkindependently,thusmustnotdemand
Notallnewelementsofthatprocesscanbereviewedhere;wefocusontheelementscapturingrisksandvulnerability.Thescoreboardandinparticulartheissueofcurrentaccountsurplushadbeendiscussedintenselyamongpoliticians.
612
Table6.CoreindicatorsoftheMIP’sScoreboard(EC,2012)Three-yearbackwardmovingaverageofthecurrentaccountbalance,%GDP,threshold+6%to–4%
Netinternationalinvestmentposition,%GDP,threshold–35%Five-yearpercentagechangeofexportmarketsharesmeasuredinvalues,threshold–6%
Three-yearpercentagechangeinnominalunitlabourcost,thresholdsof+9%forEuroareacountriesand+12%fornon-Euroareacountries
Three-yearpercentagechangeoftherealeffectiveexchangeratesbasedonHICP/CPIdeflators,relativeto35other
industrialcountries,thresholdsof±5%forEuroareacountriesand±11%fornon-EuroareacountriesPrivatesectordebt,%GDP,threshold160%Privatesectorcreditflow,%GDP,threshold15%
Year-on-yearchangesinthehousepriceindexrelativetoaEurostatconsumptiondeflator,threshold6%Governmentsectordebt,%GDP,threshold60%
Three-yearbackwardmovingaverageoftheunemploymentrate,threshold10%Source:EC(2012).
ortakeonorders.TheESRBprovidestheESAswithrelevantmacro-prudentialinformationandreceivesrele-vantdatafromtheEuropeanandnationalsupervisoryauthorities.Beyondthat,theESRBcollectsmacro-leveldataonregionalandsectoral(e.g.betweenfinancialmar-ketactors,products,markets,theeconomyandpublicfinances)interlinkages(cf.DeutscheBundesbank,2012,29ff.).TheESRBformulatesrecommendationsandtherespectiveaddresseeneedstoinformtheESRBandtheEuropeanCouncilaboutstepstaken.TheESRB’smainworkisconfidential.AlthoughtheESRBissupposedtobeasupervisoryagency,itmainlyservesasanadvisorybodysinceitdoesnothaveanyenforcementinstrumentsatitsdisposal.
IV.InstitutionalFeaturesofanImproved
SurveillanceFrameworkfortheEuroAreaAsthecrisesmadeclear,vulnerabilityandriskanalysesarecrucialtodetectingunfavourabledevelopments.Europeaninstitutionsaretryingtofillconceptualgapsbymoderatelyintegratingvulnerabilityconceptsintotheexistingsurveillanceprocesses.Whilefiscal,economicandfinancialstabilityhavebeenaddressedbytherefinedandnewlyintroducedprocesses,theystillhaveconceptualshortcomingsandtheyarenotsufficientlyconnected.Thefollowingconceptualelementsandinstitutionalexten-sionswouldimprovethesurveillanceprocessesanalyti-callyandincreasetheireffectiveness.Conceptualelements
TheshortcomingoftheSGPandtheMPIcouldbeaddressedbyindividuallyextendingeachoftheprocesses
C.Kastropetal.
bydeeperanalysesandbyconsideringthemcomprehen-sivelyandtogetherwithmacro-prudentialsurveillancetools.
Medium-termprojections.Both,theSGPandtheMIP,workintheshortterm,whereassustainabilityreportingislong-termoriented.Inordertocapturecurrentvulnerabil-itiesandriskswithregardtofutureprobabledevelop-ments,anadditional,medium-term-orientedstrategyisneeded.Onewaytouncovertherisksfacingfiscalsustain-abilityinstitutionallycouldbebycreatingareportingandmonitoringframeworkinadditiontotheSGPframeworkandthesustainabilityanalysis.Suchaforward-lookingmedium-termanalysiscoveringaperiodof10–20yearswouldhavetheadvantageofbeingmorepolicyorientedthantheverylongtermsustainabilityreportingandamoreeffectiveearlywarningtoolthantheveryshorttermorientedSGP.TheECisplanningtoincorporateamed-ium-termprojectionintoitssustainabilityreport.However,integratingitintoasurveillanceprocess–andnotjustreportingaboutit–mightfosterthesurveillance’s,foremosttheSGP’s,effectiveness.
Safetymargins.Themedium-termprojectionscouldberefinedbyintroducingsafetymargins.AnambitiousshiftoftheSGP’sanchor,theMTO,fromdeficittosurplusrequirementsseemsindispensable.Fiscalrisks–notonlystemmingfromageingsocieties–callforaprudentsafetymargintoincreasetheresilienceofpublicbudgetsagainstfuturechallengesandshocksandinordertoaddressthefiscalchallengesofthedemographicchangeahead.TheMTOshouldbeorientedtowardsacyclicallyadjustedbalancedbudget.Notonlypublicdeficitsbutalsodebtlevelscouldbeassessedmakinguseofsafetycon-siderationsdependingontheindividualcountry’scontext.Forexample,the60%-Maastrichtreferencevaluemightbetooweak.Safetymarginstothis60%-thresholdbasedondetaileddebtsustainabilityanalysesmayresultinallowinglowerdebttoGDPratios.Inserioustimes,adjustmentsshouldrequireevenstructuralsurplusesinordertodecreasethepublicdebtlevelatleasttotheSGP’sandFiscalCompact’s60%-threshold,toregaincredibilityandincreasescopeforactiontoprepareforfuturechallenges.Thatistrueevenmoreasthemajoreconomieswillfaceadramaticpressureonpublicdebtevenundersignificantbudgetconsolidationscenariosfol-lowingthecurrentSGPrules(DBResearch,2011).Inthatcontext,itshouldbeensuredthateconomicandfiscalforecastsareconductedbymoreprudentcalculations(lowerconfidencebounds,referredtoassafetymargins).Anearlywarningmechanism.Thetwoproposalscouldtranslateintoanearlywarningmechanism.ThismechanismcouldbuildontheworktheECundertakesregardingfiscalvulnerabilitiesandtheenhancementofthe
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IMF’sEWEforEuropeanpurposes.FiscalsustainabilityshouldbeatthecoreofthenewmechanismtoeffectivelycomplementtheEC’scurrentsurveillancemandateforpublicfinancesandeconomicimbalances.Themechan-ismcouldaddfinancialandrealeconomicindicatorstotheanalysesinordertoassessvulnerabilitiesandrisksstem-mingfromtheseareasforthepublicfinances’sustainabil-ity.Also,themechanismcouldbeenrichedbycontagionandspill-overmodelssimulatingthematerializationofrisksinspecificcases,andbymodelsthatcarryoutamoreprofoundriskanalysisforcertainimportantriskareas,suchasthefinancialsector.Acountry-specificapproachbytheECcouldalsoinfluencethedeterminationofcountry-specificsafetymarginsandcountry-specificmaximumdebtlevelsallowedintheSGP.Hereby,theECshouldespeciallydifferentiatebetweenthedifferentchallengesandresponsibilitiesofthosecountriesthathavetheEuroincontrasttothosewhohavenot.Itcouldbediscussedwhetherresultsshouldbemadepublicornot.Ontheonehand,someofthedatausedareconfidential;ontheotherhand,onlypublishedinformationwilleffectivelyworkaspeerpressure.
Copewithspill-overs.TheEuroareaeconomiesfacestrongspill-overeffects,notonlyfromtherealeconomybutevenmorefromtheeffectsofthefinancialsectoronthegeneraleconomyandonthefiscalsector.Therefore,itiscrucialtoimplementmechanismsthatexplicitlyaddresstheseaspects.Inordertokeepaclear-cutmandate,theSGPisnotsupposedtoincorporatesuchanalyses.TheMIPalreadytriestoassesseconomicspill-overeffects.However,itfocussestoomuchoncurrentaccountimbal-ances.Sofar,spill-overeffectsbetweenthethreemen-tionedareasarehardlycaptured;anearlywarningmechanismandrelatedsimulationscouldmakeupforpartofthat.Further,aprocessshouldbeestablishedthatlinkallindividualprocessesconductedbythedifferentinstitutions,includingmacro-andmicro-prudentialsuper-vision.UndertheEuropeanSemester,representativesoftherespectiveinstitutionsshouldconductstresstestingandcontagionmodelsimulationsonaregularbasis.Resultsshouldtranslateintoinstitution-andcountry-specificrecommendations.Inordertokeepresultsandrecommendationsasfrankaspossible,resultsshouldnotbemadepublic.Whetherrecommendationshavebeentakenintoaccountshouldbeevaluatedintheindividualsurveillanceprocesses.
Institutionalreformcomponents
Europeancommitteeonsupervisorydataanalysis(supervisorycommittee).Theconceptuallackofcon-sideringspill-overeffectsismirroredbytherespectiveinstitutionalshortcomings:whileproceduresandrelatedinstitutionsavoidtakingspill-overeffectsintoaccount,
613
onlyanintegratedapproachconnectingallsurveillanceprocesseswouldbeabletoaddressvulnerabilitiesandrisksintheEuroareaservingasa‘fortress’againstfuturecrises.Therefore,aEuropeanCommitteeonSupervisoryDataAnalysisshouldcomplementallsurveillancepro-cessesasatechnicaladvisorycommittee,conductingtherelevantanalysesandsupportingtherespectiveinstitu-tionsasanadvisorycommittee.Thecommitteeanditsmembersshouldbepoliticallyindependent.Membersbeingappointedfor,e.g.sixyears(max.twoterms),bytheresponsibleEuropeaninstitutionsshouldhaveastrongdataanalysisbackgroundandbesupportedbyanade-quatelylargestaffedsecretariat.
TheCommitteewouldconductdifferenttypesofana-lysesonfiscalsustainability,bothshort-andlong-term.MostofitsworkwouldtargetanalysesregardingEuropeanlevelsupervisoryschemesliketheSGPandMIP,buttheCommitteecouldalsobechargedwithmacro-prudentialanalysessupportingtheESRBorwithexamin-ingEuropeangoalssuchasoftheEurope2020strategy.Thereby,asregardsthestructureinFig.2,theCommitteeshouldbeinstitutionallyindependentfromexistingpro-cessesbutcansupportallofthembydataanalyses.Itwouldbeasimpleadvisorybody,hence,therespectiveEuropeaninstitutionswouldkeeptheresponsibilitytodecideupontheuseoftheanalyses’resultsandthefor-mulationofrespectiverecommendations–e.g.regardingtheSGPandMIPandthedefinitionofexcessivedeficitsandimbalances.Nonetheless,theCommitteeshouldmakeresultspublic(e.g.SGPandMIPforecasts)andtherebyimplicitlyputpressureontheECandthenationalgovern-mentstotakethemintoaccount.Onlypublishedinforma-tionorthethreatofinformationbecomingpubliccoulddisciplinecountriestoactaccordingtotherules.Inordertodevelopthenecessarydesignfeaturesofsuchanewsurveillanceinstitution,wecanbenefitnotonlyfromtheexperiencesobtainedinHungary,whereanindependentFiscalCouncilwaschairedbyGeorgeKopits(2012;cf.DebrunandTakahashi,2011;Nyikos,2013),butalsofromotherindependentbodies,suchasintheNetherlandsorSweden,whichhelptocontrolpublicexpenditure.Integratedsurveillanceframework.Aspointedoutinthesectionabove,anintegratedapproachisneededtoeffectivelycapturespill-overeffectsandtherelatedthebuild-upofvulnerabilitiesandrisks.Therefore,allrele-vantinstitutionsshouldconveneonaregularbasisandexchangeinformationandevaluationsoftheirrespectivefieldsofaction.TheEuropeanSystemofFinancialSupervision(ESFS)couldserveasanexample.Moreover,tocomplementthesupervisionrelatedtofinan-cialvulnerabilitiesandrisks,amicro-prudentialsupervi-sorybodyaspartofapossiblebankingunioncouldbeestablished.Also,thiswouldprovidemoreinformationonrealeconomicdevelopmentsandregionaldispersionsofa
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financialinstitution’srisksduetofundingofpublicbodies.Thiscouldfostertheassessmentofspill-overeffectsbetweencountriesandamongthefiscal,financialandeconomicfieldsandhelptodetectcontagionchannelsandrelatedvulnerabilitiesandrisks.Suchanintegratedframework,atleastwhenitcomestoassessingfuturerisks,couldleavetheestablishedcorrectivearmsuntouchedasitmightbeappropriatetoleavetheprocessesseparatewhileassessingpossiblefuturerisksinamorecomprehensivemanner.
V.Conclusion
TheEuropeanconcepts,institutionsandprocesseshavetoensurethatnotonly‘expectedrisks’butalsounlikelyorunknownrisksassociatedwithaglobalized,highlyinte-gratedworldorrapidlyevolvingcontagionriskscanbedealtwith.Thecrucialtaskofsuchanextremescenariotreatment,prominentlydescribedbyTaleb(2010),istobuildrobustsystemsandbeingabletoexploitpositiverisks.Asthefinancialandsovereigndebtcrisishasshown,financialmarkets,therealeconomyandnottheleastpublicfinances,areveryvulnerabletohazardousBlackSwaneventsandexposedtowelfarelossesbeyondthosepredictedinstandardmodels.
Atthesametime,itisquiteobviousthattherewillneverbeacomprehensiveearlywarningframeworkoverseeingallfactorsandtheirinterplaythatpreventsfinancial,macroeconomicandsovereigndebtcrises.However,thecurrentframeworkcanbeimproved,andtherearenowelementsavailablethatcouldservemuchbetterasearlywarninginstruments.WhentheSGPwasdesignedinthelatenineties,itsdesignwassolelyfocussedonfiscalstability.Somecountrieschosethispathsuccessfully,butonlyuntilthecrises.Thebasicthinkingwasthatrequiringfiscalstabilitywouldmotivaterelatedpolicies,suchasstructuralreforms.Consideringonlythedeficitcriterionandneglectingthedebtcriterionandothermacroeco-nomicandfinancialmarketindicators,shapedanarrowunderstandingofwhatinfluencesfinancialstability.Atleastnow,politiciansknowthatallthementionedele-mentsplayarole,andthatthesettingofallthreediffersbetweencountries.Accordingly,thecurrentEMU’sinsti-tutionalframeworkhastobeenhancedbysomeinstitu-tionalelements.Apartfromthat,methodsandmodelsshouldbecontinuallyassessedandimproved.Betterwaystoassessdataandtodefineindicatorsneedtobefound.Considerationofpoliticaleconomyandeffectivecommunicationdemandsthatmethodsandprocessesbekeptsimpleandtransparent.Inanycase,methodologyshouldnotsticktoanideologicalschool–suchasneo-classicalorKeynesianconcepts–butshould‘useanyrodtocatchthefishnotdiscussingwhethertherodhastobewoodorKevlar’.Furthermore,itwouldbeenrichingto
C.Kastropetal.
findawaytokeeptheinstitutionaldesignopen,asa‘self-learning’structure,sothatitadaptseasilytochanginginitialconditionswhilestayingthesameduringdifferent‘seasons’.Alotmorework,especiallyregardinginstitu-tionaldesigns,shouldbeundertaken.
Acknowledgements
TheauthorsthanktheparticipantsoftheBdFconferenceandinparticularAntónioAfonso,RüdigervonKleistandWilliamBruntonforfruitfulcommentsonthesubject.Theopinionsexpressedinthisarticlearetheauthors’personalonesanddonotnecessarilyreflectthepositionsoftheGermanFederalMinistryofFinance.
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