1. FISCAL COORDINATION
EU ECONOMIC GOVERNANCE
18.01.14
TEODOR KALPAKCHIEV

2. THE EUROPEAN CENTRAL
BANK
 Art. 127 TFEU / Art. 2 Statute of ECB – Primary
objective: To maintain price stability
 Inflation Targeting = Price Stability
 Governing Council: "Price stability is defined as a year-
on-year increase in the Harmonised Index of
Consumer Prices (HICP) for the euro area of below 2%.“
 Medium-term orientation
 Counter shocks /demand nature, cost-push nature/

3. Decisi
on –
Makin
g
Executive
Board
Implementation of Monetary
Policy
Daily Maintenance
President, Vice, 4 other
Members (8)
Governing
Council
Main decision-making body
Executive Board + Governors
NCB (18)
General
Council
Transitional Issues
President, VP, NCB Governors
of all MS (28)

4. OPTIMUM
CURRENCY AREAS
Necessary
Requirements
Labour
Mobility
Full Implementation
Freedom of movement, workers’ rights,
institutional arrangements
Openness
Price and wage flexibility
Wage Flexibility ?
Risk-sharing
system
Automatic fiscal transfer mechanism /
Solidarity /
No-bail out clause in the Stability and
Growth Pact
Separate arrangement – EFSM / ESM
Joint central
bank
Corrective Mechanism
Contain Inflation
Promote growth through interest rates
- Maximize economic efficiency
- Optimal characteristics for
emergence of a currency zone
- Conceived by Robert Mundell

5. THE IDEAL (CASE)
• Centralization of budgets of MS (Federal
Budget)
• European Social Security System
• Income taxes levied by an European
Government
• Variables: Demand, Output, Income tax
revenues, social security contributions,
unemployment
• Additional benefit: Fragility of (a
presumptive) Bond Market is reduced
• Pooling the Issue of governmental bonds
• Ability to control the currency in which the
debt is issued
• Critique
• Moral Hazard
• Ratings and International Borrowing
• Differentiation of debt into below (blue) and
above (red) 60% of GDP (Grauwe, Moesen,
Bruegel)

6. IN REALITY
No centralization of national
budgets
Countries experience asymmetric
shocks
Increase borrowing = Increase
External Debt
Implications:
• Centralize budgets to reduce
fragility
• If not, flexibility of national fiscal
policies should be allowed

7. SIX PACK
Five Regulations and one Directive /all
MS/
Fiscal and macroeconomic surveillance
Operationalizes the debt criterion
Interest bearing deposit 0.2 % (up to
0.5%) GDP
Reverse QMV
Two-Pack (I.F. 30.05.13): 1) Budgets
3 year budget plans and draft budgets
to be approved by EC and the
Eurogroup
Analyses whether in line with
E.Semester and GSP – opinion or a
revised draft

8. SIX PACK
Two-Pack: 2) Financial difficulties
EC decides on Euroarea MS, ESM MS –
auto
Involves: address the sources of
instability, review missions, quarterly
reporting from EC to Eurogroup
MS might seek technical assistance
(Task Forces)
Council may decide the MS does not
comply with the adjustment program –
disbursements
(Draft) post-programme surveillance as
long as it has not repaid 75% of its
debt

9. MACROECONOMIC
IMBALANCE
PROCEDURE
• Introduced Autumn 2011
• Part of the Six-Pack
• Indicators are not interpreted directly
• EC determines if imbalances exist and
what is their nature
• Not severe: Incorporated in the
European Semester – Preventive Arm
• Severe: Corrective Arm
• Surveillance and Regular Progress
Reports
• Enforcement (up to 0.1% GDP), if the
country fails to deliver a corrective plan
or the agreed actions
1st Alert Mechanism Report in
February 2012 – Preventive Arm
Belgium, Bulgaria, Cyprus, Denmark,
Finland, France, Italy, Hungary,
Slovenia, Spain, Sweden and the
United Kingdom.
2nd Alert Mechanism Report in
November 2012 – excessive
imbalance in Spain and Slovenia, but
not triggered
3rd Alert Mechanism Report –
widened: Germany, Croatia and
Luxembourgh

10. THE EURO + PACT
• Adopted in March 2011
• Tax Policy Coordination only as
commitment
• Four Main Goals
• fostering competitiveness
• fostering employment –
flexicurity, lowering taxes on
labour, targeting older
workers, limit early retirement
• sustainability of public finances
on national and sub-national
level
• reinforcing financial stability
• Abolish wage indexation – not compensate for
inflation, less expensive to employ people /
less purchasing power
• Common Corporate Tax – reduce administrative
burden / detract from competitiveness in
certain countries
• Raising Pension Age – Revenues and less
burden on social security funds / social costs
• Adopting debt brakes (as in Switzerland and
Germany)
• Promote flexicurity
• Private debt

11. THE EUROPEAN SEMESTER
• Pre-Phase: November/December:
• Annual Growth Survey – policy priorities
• Alert Mechanism Report – macroeconomic
development
• EC may decide to conduct in-depth review
• 1st Phase: January/February:
• Council discusses it in different formulations
• EP too and publishes opinion on employment
guidelines
• Economic dialogue with other actors
• March:
• E. Council – policy orientations
• EC – in-depth review of marcro imbalances
• EC may draft recommenations
• April: MS submit their
• Stability or Convergence Programmes
• National Reform Programmes
• May/June: EC evaluates and issues
recommendations, the Council discusses them,
the European Council endorses them
• June/July: Country-specific recommendations
are adopted by the Council

12. FUTURE
• Eurobonds
• Convergence and Competitiveness
Instrument /Structural reforms
contractual agreement/
• Build on MIP, a filter for major
reforms eligible to be accompanied
by fin. support
• Financial Transaction Tax
• Single Supervisory Mechanism
/European Banking Authority/
• Single Resolution Mechanism

13. THANK YOU.