Tag Archives: fiscal policy

Report on the Public Finances of the EU

The European Commission has published the 2010 Report on Public Finances in EMU. The report reviews how Member States’ fiscal policies have evolved in the wake of the financial and economic crisis. It assesses the prospects for public finances and policy needs ahead.

The report says that both government deficits and debt have deteriorated markedly, reaching levels unprecedented in recent times in the EU. This strong deterioration in the public finances is due to both the automatic effect of economic performance and the support measures introduced by EU governments. According to the Commission these temporary measures have had positive effects on employment and economic activity during the crisis, by supporting private demand and maintaining fundamentally sound activities and jobs that could otherwise have been lost.

The report further notes that reduced fertility and increased life expectancy are set to have a considerable impact on both the growth potential of Member States’ economies and on public budgets. Member States with large deficits and large projected costs from ageing facing the biggest risks, and the most urgency in terms of addressing long-term sustainability issues.

An alarming finding of the report is that the significant consolidation of budgets set out in the Stability and Convergence Programmes are not sufficient to stem or reverse the increases in debt from
the crisis. According to the Commission Member States should seek to shift the tax burden from labour to energy and environmental taxes as part of a “greening” of taxation systems. The report says that expenditure-based consolidations have better track records of success than ones based on tax increases, while gradual consolidations tend to have higher success rates than “cold shower” ones.

United States of Europe, Anyone?

It is always useful to see yourself through the eyes of your peers. Now Citigroup Inc. has provided us with such an assessment, as reported by Bloomberg. Here’s what Tom Fitzpatrick, chief technical analyst at Citigroup in New York, wrote in a note to clients:

“Europe needs to stand up and decide if it is going to be a ‘United States of Europe’ or a ‘patchwork quilt’ of independent states.”

A difficult dilemma. Being a technical analyst, Mr. Fitzpatrick may not know what it means and how much it takes to develop this ‘patchwork quilt’ in the first place. But he knows something else very well: that monetary integration is impossible without fiscal integration.

This conundrum will not be solved, at least not decisively. Olli Rehn has good ideas, but they will, probably, not be adopted.

Economic statism is safe and sound in Europe. It will take much more than a bailout for Greece before the Member States start questioning their current political dogma.