Community Research and Development Information Service - CORDIS

H2020

FIRSTRUN Report Summary

Project ID: 649261
Funded under: H2020-EU.3.6.

Periodic Reporting for period 1 - FIRSTRUN (Fiscal Rules and Strategies under Externalities and Uncertainties)

Reporting period: 2015-03-01 to 2016-02-29

Summary of the context and overall objectives of the project

The FIRSTRUN project investigates the need for fiscal policy coordination in the EU, assesses the coherence of the recent reforms in the economic governance framework, and seeks to identify reforms to fill possible gaps in the current EU governance framework. To this end, it pursues the following interrelated goals:

i) To assess the effectiveness of the enhanced EU economic governance in securing fiscal sustainability and effective stabilization;

ii) to quantify the importance of fiscal policy spillovers and the gains from fiscal policy coordination in the EU;

iii) to evaluate the potential role of new shock-absorbing mechanisms;

iv) to design fiscal policy strategies that take into account the rules of the reinforced Stability and Growth Pact and other components of the EU economic governance;

v) to incorporate the key rules of the enhanced Economic governance into applied models that are used for practical fiscal policy evaluation;

vi) to investigate the institutional mechanisms for ensuring fiscal discipline, better fiscal policy coordination and how their legitimacy can be assured in the light of the growing disquiet about EU policies.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

Our first task was to take stock of the existing literature and develop a conceptual framework for the overall project. We discussed the scope of the review already in our kick-off meeting in March 2015. We discussed the review again with all partners in an internal meeting in September.

In addition to providing a conceptual framework, including a classification of different type of spillovers and different fiscal coordination mechanisms, the review (deliverable 1.1) provides a discussion of a theoretical literature that attempts to identify the general conditions under which fiscal coordination can be expected to improve welfare. This literature provides guidance to our own research, allowing us to focus on cases where fiscal coordination is most needed. Some of the related literature is also discussed in deliverable 3.1 which focuses on the concept of fiscal union and its rationale.

Another urgent priority was to get our hands on real-time data of fiscal variables in the EU. Real-time data refers to data that reflects information available at a given point in time. For instance, official GDP figures for a given year are typically revised several times. Real-time data tracks the changes in the GDP estimates over time. We are especially interested in structural fiscal measures, such as the structural budget balance, which measures the budgetary position of public finances when the effects of economic cycles are eliminated. This is because they have a central role in the EU’s new fiscal policy legislation framework.

Representatives of the Commission kindly helped as to compile a data set that consist of the Commissions’ real time estimates of fiscal measures from year 2000 onwards. The data set, which is now available at firstrun.eu/data and will be updated regularly during the project, will be used in several separate studies within our project.

Our first results already suggest that considering real-time data on fiscal variables is perhaps even more relevant and interesting than what we had anticipated when writing our research plan. The results reported in deliverable 2.2 suggest that the output-gap method used by the Commission has a very limited capacity of predicting cyclical changes in real time. As a result, the current EU fiscal rules may lead to procyclical fiscal policy (stimulus in upturns and austerity in downturns). Related to this, deliverable 4.1 shows that the cyclical properties of actual fiscal policies in Euro Area member states look quite different if they are estimated using real-time estimates of the output gap as opposed to the usual ex-post estimates. In other words, it seems very important to acknowledge that policy makers have only incomplete information of the state of the economy at the time policies are set.

A key concept for our project is that of a fiscal spillover. Deliverable 1.2 uses the National Institute Global Econometric Model (NiGEM) to quantify fiscal spillovers between EU countries and to analyse how they depend on the state of the economy. The results reveal, for instance, that fiscal spillovers increase substantially when the proportion of liquidity constrained households increases, as is likely to happen in deep economic downturns, especially following a financial crises. These results will later be used in policy analysis.

NIESR investigated the determinants of sovereign bond yields in the Euro Area. The key question is to what extent monetary policy, which directly controls the path of short-term nominal interest rates, is a driver of longer-term sovereign yields. The analysis covers the recent dramatic changes in the Euro Area monetary policy (e.g. the so called “outright monetary transactions” and large-scale purchases of public sector assets). According to the results, reported in deliverable 4.5, the reduction in Northern Euro Area sovereign bond yields in recent years has been driven by the current and expected future loose stance of monetary policy. In the periphery economies this effect appears to have been dominated by other factors, such as default risk. This research informs us about the relationship between the common monetary policy and the borrowing costs faced by Euro Area member states.

In addition to analysing fiscal coordination from the point of view economic outcomes, we analyse the institutional mechanism needed for effective fiscal coordination and their legitimacy. Related to this, deliverable 6.1 puts forward the concept of the ‘expenditory state’ as an emerging form of governance characterised by a mix of rules and institutional developments that constrain the autonomy of governments in the conduct of fiscal policy.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

We have already provided new critical insights about the current fiscal coordination mechanisms. In particular, the results reported in deliverable 2.2, show that the current EU fiscal rules may lead to procyclical fiscal policy (stimulus in upturns and austerity in downturns), partly because the output-gap method used by the Commission has a very limited capacity of predicting cyclical changes in real time. Related to this, we have also already analysed the alternative ways of measuring the fiscal stance. The results suggest that so called discretionary indicators (expenditure benchmark and bottom up assessment) should be used alongside the standard measure of structural balance. We have also shown (see deliverable 4.1) that the cyclical properties of actual fiscal policies in Euro Area member states look quite different if they are estimated using real-time estimates of the output gap as opposed to the usual ex-post estimates. In other words, it seems very important to acknowledge that policy makers have only incomplete information of the state of the economy at the time policies are set.

In addition to analysing fiscal coordination from the point of view economic outcomes, we have analysed the institutional mechanism needed for effective fiscal coordination and their legitimacy. Related to this, deliverable 6.1 puts forward the concept of the ‘expenditory state’ as an emerging form of governance characterised by a mix of rules and institutional developments that constrain the autonomy of governments in the conduct of fiscal policy.

Related information

Record Number: 190150 / Last updated on: 2016-11-08
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