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Economics of EU integration > Session 11 > Flashcards

Session 11 Flashcards

1
Q

What were the key takeaways following the Berlin View Reform?

A
  • Accent was put on strengthening compliance to stricter rules
  • Continuous and ex ante coordination control through the EU semester
  • Recognition of macroeconomic imbalances (but not as much as fiscal discipline)
  • Refusal to collectively manage country shocks
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2
Q

What did the EU launch for its EU fiscal rule reform?

A

A consultation process on February 5th 2020

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3
Q

Which new question arose for industrial policies?

A

Vaccines but also the role of the entrepreneurial state

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4
Q

What was proposed to harmonise tax policies?

A

A Common Consolidated Corporate Tax Base to avoid fiscal dumping.

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5
Q

What the three premises of EU reform?

A
  • Fiscal Policy is bac in the policy toolbox
  • Lessons from the crises
  • Need to realign the theory and the practice of the EU
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6
Q

Specify the topics that fiscal policy is to tackle.

A 
New countercyclical fiscal policy 
Long term investment and industrial policy 
Ecological and digital transition 
Global public goods 
Secular stagnation and zero lower bound
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7
Q

What were the lessons from the crises?

A
  • The single currency cannot function without active macroeconomic policies.
  • Because there are no symmetrical shocks, the common response to shocks is more efficient.
  • Solidarity is acceptable to all MS if properly framed
  • The coordination of national policies can be achieved efficiently through conditionality
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8
Q

Why are fiscal rules important?

A

To affect short term Keynesian stabilisation and long-run growth through industrial policy and public investment

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9
Q

What are the economic differences between the EU on paper and in practice?

A

On paper:

  • Constraints on budgetary policies (Stability Pact)
  • Anti-inflationary monetary policy
  • Industrial policy that relies on competition policy to create a level playing field

BUT in practice:

  • Massive intervention was needed to cope with the pandemic and restart the economy through NextGeneration EU
  • there was monetary support (whatever it takes and PEPP)
  • Public investment for industrial policies
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10
Q

What place does public investment have now?

A

It is at the center stage. Prior to that, it has decline from 2008 to 2016 because of fiscal consolidation. In 2018 it’s 15% lower than in 2008 (2.9 vs 3.4). It’s a free lunch in the current conditions.

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11
Q

What was particularly hit by the drop in public investment?

A

Infrastructures.

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12
Q

What is happening to Germany with respect to Public Investment?

A
  • There has been a severe deterioration of public capital stock since 2000
  • Demographic change, decarbonisation and digitalization makes it so there are additional investment needs
  • Sector by sector analysis -> estimation of 450 billion € over the next decade.
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13
Q

What’s industrial policy?

A
  • Incentives to boost entry in high value-added sectors
  • Market opens to avoid rents and to exploit economies of scale
  • Selection and temporary protection
  • Focus on bottlenecks and a constant stream of demand (fiscal policy)
  • Public investment
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14
Q

What kind of policy is industrial policy?

A

It is multidimensional in that it tackles taxes/incentives, regulation, trade, competition, monetary policy, finance investment…

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15
Q

What kind of tradeoff awaits us related to fiscal policy?

A

The stability and growth tradeoff, because of the renewed importance of fiscal policy. A permanent capacity to implement discretionary policy is needed + a central fiscal policy.

Either- fiscal capacity at the center and constrain MS (US model)
- Keep most of fiscal policy national and radically reform fiscal rules

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16
Q

What did the European Fiscal Board find in its assessment of EU Fiscal Rules?

A

It focused on pro cyclical fiscal rule, bill on cyclically adjusted deficits and on natural/potential output.
It is impossible to enforce because the bargaining game plus it has a bias against investment.

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17
Q

How did crisis reform worsen the EU Fiscal Rules flaw?

A
  • The 2-6 pack put the emphasis on structural targets
  • Fiscal Compact put debt back in the Equation
  • 2020 Commission consultation process
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18
Q

What are the variables involved in the current framework?

A
  • Public deficit
  • Public Debt
  • MTO
  • Short term change in the structural balance
  • Change in public expenditure
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19
Q

Qualify this framework and explain why

A

The framework is too complex, and surveillance is almost impossible despite the streamlining of sanctions. Plus any deficit can be agreed or negotiate, and constitute a political choice
- Portugal 2016 and Italy 2020

20
Q

What are the 3 pillars that a robust rule needs?

A
  • A long term objective
  • An operational rule to steer budget laws
  • Supervision by an independent authority
21
Q

Ideally, how could we get rid of numerical targets?

A
  • Coordination on credible public finance trajectories consistent w/ common EMU objectives and long term debt sustainability
  • Forum could be the European Semester
  • Democratic ownership, w/ Eurogroup and Council
  • Fiscal policy would remain with MS
22
Q

What is the golden rule?

A

Balance the current budget over the business cycle

23
Q

What are the advantages of the golden rule?

A

Debt/GDP -> Kg/GDP
It is intergenerational fair
The burden of fiscal consolidation falls on current expenditure

24
Q

What are criticisms against the golden rule?

A

It introduces a bias on physical capital

Public investment is a slippery concept that creates a risk of creative accounting

25
Q

How could one turn risks posed by the golden rule into a strength?

A

By making the definition of public investment a political issue.

26
Q

What does Saraceno propose?

A

To make the golden rule as an instrument for industrial policy.

  • Periodic democratic assessment about the need in capital
  • Council, Commission and Parliament jointly decide on items of public expenditures that are EU priorities
  • Countries implement joint projects given incentives
27
Q

What is needed to create some semblance of central fiscal capacity?

A
  • EMU unemployment scheme
  • EMU stabilisation fund
  • Completion of capital market union and banking union
  • Coordination and common industrial policies
  • EU wide investment programmes in global public goods
28
Q

What is the objective of a central fiscal capacity?

A

The objective is to increase the risk sharing capacity to curb divergence.

29
Q

What may be a game changer for central fiscal capacity?

A

The recovery and resilience Facility.

30
Q

Wha could the recovery fund pave the way for?

A

Permanent fiscal capacity for the EU, define :

  • how to spend it
  • on what? Industrial policy and role of the entrepreneurial state
31
Q

What is the effect of differences in corporate tax?

A

It pushes firms to move capital and investment to low-tax countries and it shifts paper profits to tax havens

32
Q

How much of multinational profits shifted to havens?

A

40% so around 600 billion$

33
Q

Who are the main winners of this shift to tax havens?

A

Ireland, Luxembourg, Singapore

34
Q

Who are the main losers of shift to tax haven?

A

Non-haven EU countries.

35
Q

What is the cost of profit shifting?

A
  • Distorted competition
  • Inequality
  • Loss of tax revenue
36
Q

What are the two pillars of the BEPS (Inclusion Framework on Base Erosion and Profit Shifting)?

A
  • Common consolidated tax base for multinationals

- Global minimum corporate tax rate

37
Q

What are the 2 steps of the European Commission proposal for a Common Consolidated Corporate Tax Base?

A
  • Harmonised definition of the corporate tax rate across member states to reduce complexity
  • Consolidated accounting of the tax base across MS via formula apportionment (33% of sale/ non financial assets/ labour share)
38
Q

What is the OECD Compromise?

A

Adopted in 2021 it accepted the two pillars + minimum tax rate of 15%. Its problem is its lack of ambition:
- too low a minimum rate, consolidation apportionment based on sale…

39
Q

Is public debts here to stay?

A

Yes.

40
Q

What is the paradigm shift on the management of public debt?

A

From solvency to sustainability. Instead of paying debt it should be serviced, because debt can be rolled over. Solvency is not a global issue.

41
Q

How can we manage the EMU debt?

A

With the ECB, through monetisation and rolling over of Covid debt. It does not have to be inflationary, and if done properly, it would not lead to fiscal dominance nor credibility loss.

42
Q

What are potential problems posed by relying on the ECB to manage the EMU debt?

A

It is reversible at any moment, so public debt would not be shielded from market sentiment
the objective of stabiliting debt would make it harder for the ECB to focus on its core business:
- closing the output gap
- closing the inflation gap

43
Q

What are the benefits associated with a management of the EMU debt at the European level

A
  • Safe asset
  • Elimination of liquidity risk for individual countries, at an increased fiscal space
  • Take the burden off the shoulders of the ECB
  • Normaize the yields of EMU core countries sovereigns
44
Q

TO ensure the political feasibility of te management of the EMU debt at the EU level what needs to be done?

A
  • Avoid debt mutualisation
  • Avoid elimination of fundamental risks
  • Avoid juniority effects and so market pressure and financial instability
45
Q

How would a European Debt Agency work?

A
  • A bank with adequate solvency capital, middleman btw states and markets
  • Issuance of AAA bonds to finance perpetual loans, filter refinancing and liquidity risk
  • MS can redeem at any time
  • Outstanding debt is progressively absorbed
  • Pricing of instalment reflect fundament risk as assess through debt sustainability analysis and compliance to fiscal rules
46
Q

What are the benefits of a European Debt Agency?

A
  • Neural with respect to fiscal goernance
  • Division of task
  • Stabilisation of marke expectations

Economics of EU integration (11 decks)

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