nep-eec New Economics Papers
on European Economics
Issue of 2021‒03‒22
twenty-two papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The political economy of euro area sovereign debt restructuring By Heinemann, Friedrich
  2. Risk shocks and divergence between the Euro area and the US in the aftermath of the Great Recession By Brand, Thomas; Tripier, Fabien
  3. Investigating a measure of conventional and unconventional stimulus for the euro area By Arne Halberstadt; Leo Krippner
  4. The Anatomy of Government Bond Yields Synchronization in the Eurozone By Claudio Barbieri; Mattia Guerini; Mauro Napoletano
  5. Evaluating the impact of labour market reforms in Greece during 2010-2018 By Gatopoulos, Georgios; Louka, Alexandros; Polycarpou, Ioannis; Vettas, Nikolaos
  6. Survey-Based Structural Budget Balances By Marcell Göttert; Timo Wollmershäuser
  7. What affects bank market power in the Euro area? A structural model approach By Paolo Coccorese; Claudia Girardone; Sherrill Shaffer
  8. Proposals for a reform of the EU’s fiscal rules and economic governance By Sebastian Dullien; Christoph Paetz; Andrew Watt; Sebastian Watzka
  9. On the transmission of monetary policy to the housing market By Winfried Koeniger; Benedikt Lennartz; Marc-Antoine Ramelet
  10. Cyclical patterns of the Spanish economy in Europe By Luis J. Álvarez; M.ª Dolores Gadea; Ana Gómez Loscos
  11. Labour Productivity Growth Determinants in the Manufacturing Sector in the Baltic States By Toma Lankauskiene
  12. Natural unemployment and activity rates: flow-based determinants and implications for price dynamics By Francesco D'Amuri; Marta De Philippis; Elisa Guglielminetti; Salvatore Lo Bello
  13. Immigration and Voting Patterns in the European Union: Evidence from Five Case Studies and Cross-Country Analysis By Grumstrup, Ethan; Sorensen, Todd A.; Misiuna, Jan; Pachocka, Marta
  14. A News-based Policy Index for Italy: Expectations and Fiscal Policy By Daniela Fantozzi; Alessio Muscarnera
  15. The Greek Great Depression from a neoclassical perspective By Dimitris Papageorgiou; Stylianos Tsiaras
  16. Forecasting corporate capital accumulation in Italy: the role of survey-based information By Claire Giordano; Marco Marinucci; Andrea Silvestrini
  17. Interest rate pass through in the deposit and loan products provided by Greek banks By Panagiotis Lazaris; Anastasios Petropoulos; Vasileios Siakoulis; Evangelos Stavroulakis; Nikolaos Vlachogiannakis
  18. Covid-19 fiscal support and its effectiveness By Alexander Chudik; Kamiar Mohaddes; Mehdi Raissi
  19. Are firing costs important for business cycles? Lessons from Bulgaria (1999-2018) By Aleksandar Vasilev
  20. Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation By Hochmuth, Brigitte; Kohlbrecher, Britta; Merkl, Christian; Gartner, Hermann
  21. Low interest rates in Europe and the US- one trend, two stories By Maria Demertzis; Nicola Viegi
  22. Redesigning EU fiscal rules: From rules to standards By Olivier J Blanchard; Ã lvaro Leandro; Jeromin Zettelmeyer

  1. By: Heinemann, Friedrich
    Abstract: The establishment of a sovereign debt restructuring mechanism (SDRM) is one of the important issues in the academic debate on a viable constitution for the European Monetary Union (EMU). Yet the topic seems to be taboo in official reform contributions to the debate. Against this backdrop, the article identifies the SDRM interests of key players, including the European Commission, the European Parliament, the European Central Bank and national governments. The empirical section takes advantage of the recently established EMU Positions Database. The findings confirm political economy expectations: Low-debt countries support an EMU constitution that includes an insolvency procedure whereas a coalition of high-debt countries and European institutions oppose it. The analysis points towards a possible political-economic equilibrium for coping with sovereign insolvencies: an institutional set-up without a SDRM and with hidden transfers. Recent European fiscal innovatios in response to the Covid-19 solvency shock confirm this prediction.
    Keywords: sovereign debt restructuring mechanism,banking regulation,EMU reform,fiscal union
    JEL: H63 H87 F53
    Date: 2021
  2. By: Brand, Thomas; Tripier, Fabien
    Abstract: Highly synchronized during the Great Recession of 2008-2009, the Euro area and the US have diverged in the period that followed. To explain this divergence, we provide a structural interpretation of these episodes through the estimation for both economies of a business cycle model with financial frictions and risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector. Our results show that risk shocks have stimulated US growth in the aftermath of the Great Recession and have been the main driver of the double-dip recession in the Euro area. They play a positive role in the Euro area only after 2015. Risk shocks therefore seem well suited to account for the consequences of the sovereign debt crisis in Europe and the subsequent positive effects of unconventional monetary policies, notably the ECB's Asset Purchase Programme (APP).
    Keywords: Great Recession, Business cycles, Uncertainty, Divergence, Risk Shocks
    Date: 2021–03
  3. By: Arne Halberstadt; Leo Krippner
    Abstract: We investigate the effect of the “Effective Monetary Stimulus” (EMS) on German and euro-area macroeconomic variables using a small-scale vector autoregression (VAR). The EMS is obtained from yield curve data and survey data, and is designed to reflect the influence of monetary policy conducted by conventional and unconventional means. Empirically, using the EMS in our VAR obtains plausible and stable structural relationships with inflation and economic activity across and within conventional and unconventional environments, and more so than short-maturity rates or alternative metrics. These results suggest that the EMS provides a useful practical measure of monetary/financial stimulus for policy makers. Our counterfactual results indicate that EMS shocks have been stimulatory for most of the time since 2007, and more so around episodes of unconventional policy actions by the ECB. In turn, these episodes have been followed by higher outcomes of inflation and economic activity.
    Keywords: Monetary Policy, Zero Lower Bound, Dynamic Term Structure Model.
    JEL: E43 E44 E52
    Date: 2021–03
  4. By: Claudio Barbieri (Université Côte d'Azur, CNRS, GREDEG, France; Sant'Anna School of Advanced Studies); Mattia Guerini (Université Côte d'Azur, CNRS, GREDEG, France; Sant'Anna School of Advanced Studies; Sciences Po., OFCE); Mauro Napoletano (OFCE Sciences-Po; SKEMA Business School)
    Abstract: We investigate the synchronization of Eurozone’s government bond yields at dierent maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased signicantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and fight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.
    Keywords: Synchronization, Bond Yields, Factor Models, Random Matrix Theory, Monetary policy
    JEL: C38 E43 E58
    Date: 2021–03
  5. By: Gatopoulos, Georgios; Louka, Alexandros; Polycarpou, Ioannis; Vettas, Nikolaos
    Abstract: In view of long-standing weaknesses in Greece’s labour markets, several labour market reforms were implemented during the economic adjustment programmes with two objectives. Firstly, support the economy’s adjustment through more flexible labour markets and secondly, enhance gains in cost competitiveness. In relation to their objectives, we find evidence that reforms largely fulfilled the second objective and partially the first, albeit left mostly unaddressed some of the long-standing weaknesses, such as low participation rate and high tax wedge. The analysis is backed by two distinct but complementary approaches. From a micro-founded analysis, while the 2014 reduction in social security contributions positively affected incentives for official sector labour participation, those appear to have decreased cumulatively during the overall programme period. From a top-down macroeconomic perspective, findings suggest that Greece’s 2012 labour market reforms had a positive impact on reducing Unit Labour Cost (ULC), increasing the use of flexible forms of employment, slowing down unemployment rate dynamics and slightly accelerating employment growth trends. At the same time, it appears that the 2012 reforms did not improve labour participation rates, while they increased average working hours and inequality.
    Keywords: Greek crisis; labour market reforms; impact assessment; participation tax rate; generalized synthetic control
    JEL: N0 R14 J01 E6
    Date: 2021–02–01
  6. By: Marcell Göttert; Timo Wollmershäuser
    Abstract: The budget dispute between Italy and the European Commission in 2018 gave new impetus for the debate about the reliability of output gap estimation methods and their use for calculating structural budget balances. In this paper we review the main properties of the mainstream approaches and compare their performance with structural budget balances, whose calculation is based on a business survey. Our main result is that while the survey-based measure is highly correlated with the existing structural budget balances which are calculated based on some estimates of the output gap, it is significantly less revised over time and almost unbiased. Moreover, the survey-based measure could be easily implemented into the existing EU fiscal rules without any major changes.
    Keywords: fiscal rules, cyclical adjustment, output gaps, real time data
    JEL: E32 E62 H62 H68
    Date: 2021
  7. By: Paolo Coccorese; Claudia Girardone; Sherrill Shaffer
    Abstract: In this study we explore market power in 13 EU banking sectors for the years 2007 to 2019 by estimating a structural model with demand and supply equations, where the mark-up of price over marginal cost is parameterized as a measure of banks’ conduct that depends on selected factors. Our evidence indicates that EU banks enjoy a significant degree of market power, which shows a decreasing trend over time and some difference across countries. More competition is associated with higher bank density, lower bank capitalization, more efficient and stable banking systems, and better macroeconomic conditions. Finally, a clear convergence pattern emerges in the behaviour of EU banks.
    Keywords: Banking, Market power, European integration
    JEL: C36 F36 G21 L10
    Date: 2021–01
  8. By: Sebastian Dullien (Macroeconomic Policy Institute (IMK)); Christoph Paetz (Macroeconomic Policy Institute (IMK)); Andrew Watt (Macroeconomic Policy Institute (IMK)); Sebastian Watzka (Macroeconomic Policy Institute (IMK))
    Abstract: Debt-to-GDP ratios are set to rise significantly all over the world as a result of the coronavirus crisis. This will pose a huge challenge for the EU’s member states and in particular the euro area countries, because of the strict fiscal rules that apply to them. In a consultation process that began earlier this year, the European Commission is inviting proposals for reforms to the rules. The IMK advocates a reform focused on appropriate fiscal rules that promote short-term macroeconomic stabilisation and the long-term modernisation of the public capital stock, while still keeping the sustainability of public debt in mind. We propose an expenditure rule for non-cyclical, non-investment expenditure coupled with a Golden Rule for public investment. As a pragmatic solution, the permissible debt-to-GDP ratio should be increased to 90%, while escape clauses should apply during times of crisis. The proposed rules should replace the EU’s current fiscal rules. The Macroeconomic Imbalance Procedure should also be reformed at the same time. As a key part of such a reform, we advocate the establishment of a Macroeconomic Dialogue in order to ensure compliance with the reformed rules and consistency of the national strategies.
    Date: 2020
  9. By: Winfried Koeniger; Benedikt Lennartz; Marc-Antoine Ramelet
    Abstract: We provide empirical evidence on the heterogeneous transmission of monetary policy to the housing market across and within countries. We use household-level data from Germany, Italy and Switzerland together with the respective monetary policy shocks identified from high-frequency data. We find that the pass-through of monetary policy shocks to rates of newly originated (fixed-rate) mortgages is twice as strong in Switzerland than in Germany and Italy. After an accommodative monetary policy shock, this is associated in the housing market with a larger immediate, and persistent increase of transitions from renting to owning; a stronger decrease in rents; and an increase of the price-rent ratio. Within Italy, we find a stronger pass-through to mortgage rates, housing tenure transitions and the price-rent ratio in the northern regions that have been characterized in the literature as more financially developed than the southern regions.
    Keywords: Monetary policy transmission, housing market, home ownership, rents, house prices
    JEL: E21 E52 R21
    Date: 2021
  10. By: Luis J. Álvarez (Banco de España); M.ª Dolores Gadea (University of Zaragoza); Ana Gómez Loscos (Banco de España)
    Abstract: The main aim of this paper is to provide a set of stylised facts on the regularities of cyclical patterns in Spain compared with those of the major European countries and to analyse the synchronisation of the main real variables of these economies, which have close trading and financial relationships. A sectoral approach is used to take into account the heterogeneous behaviour of the different supply and demand components.
    Keywords: synchronisation, business cycle, heterogeneity
    JEL: E32 O52 C22
    Date: 2021–01
  11. By: Toma Lankauskiene (Vilnius Tech University, Lithuania)
    Abstract: This article seeks to derive the determinants of labour productivity growth in the Baltic states’ manufacturing sector and comparatively analyse the results. To achieve this, first, the growth rate of value added and its main contributors, namely hours worked and the growth rate of labour productivity, have been determined. Second, the main contributors to the growth rate of labour productivity, namely the contributions of labour composition, capital, and total factor productivity (TFP), have been established. Last, following the results, the relevant comparative analysis of newly derived indicators in the manufacturing sector has been accomplished, and conclusions have been presented. This paper used the growth accounting research methodology. Research limitations: the research was performed through the primary sources of growth approach, that is, only those determinants that remain important are incorporated in the model. Practical implications: the newly derived contributors to the growth rate of labour productivity reveal actual growth sources targeted to derive conclusions. The latter could be relevant for policy recommendations at both the national (e. g. guidelines for governmental policies for the selected economies) and the international (e.g., guidelines for EU policy and acts) levels. Originality and value: the novelty of the present study lies in the fact that the growth accounting method had not previously been applied in the manufacturing sector for the Baltic states.
    Keywords: growth rate, value-added, labour productivity, hours worked, labour composition, capital
    Date: 2021–01
  12. By: Francesco D'Amuri (Bank of Italy); Marta De Philippis (Bank of Italy); Elisa Guglielminetti (Bank of Italy); Salvatore Lo Bello (Bank of Italy)
    Abstract: Motivated by the magnitude and cyclicality of transitions into and out of the labour force, we jointly estimate natural unemployment and participation rates through a forward-looking Phillips curve informed by structural labour market flows and demographic trends. We find that the estimated reaction of inflation to the participation gap is twice as large as that to the unemployment gap, and that the participation margin accounts for a significant share of total slack. Moreover, by exploiting a far-reaching and unexpected pension reform, we study the effects of a sudden expansion in labour supply that was not directly related to unemployment. The reform triggered a marked reduction in the employment to inactivity transitions of the elderly, determining an increase in natural participation (stronger than that in observed participation) but not in natural unemployment. Thus, the trends in activity explain in part why inflation has been so low in the recent years.
    Keywords: labour market flows, labour supply, demographic trends, phillips curve, business cycles
    JEL: J11 J21 J64 E32
    Date: 2021–02
  13. By: Grumstrup, Ethan (University of Nevada, Reno); Sorensen, Todd A. (University of Nevada, Reno); Misiuna, Jan (Warsaw School of Economics); Pachocka, Marta (Warsaw School of Economics)
    Abstract: Tempers flared in Europe in response to the 2015 European Refugee Crisis prompting some countries to totally close their borders to asylum seekers. This was seen to have fueled anti-immigrant sentiment, which grew in Europe along with the support for far-right political parties that had previously languished. This sparked a flurry of research into the relationship between immigration and far-right voting, which has found mixed and nuanced evidence of immigration increasing far-right support in some cases, while decreasing support in others. Studies by Mendez and Cutillas (2014); Mayda, Peri, and Steingress (2016); Vertier and Viskanic (2018); and Georgiadou, Lamprini, and Costas (2018) found that the presence of immigrants decreased votes for right parties, while others by Otto and Steinhardt (2014); Dustmann, Vasiljeva, and Damm (2016); Halla, Wagner, and Zweimuller (2017); Brunner and Kuhn (2018); and Edo et. al. (2019) found that immigration increased votes for right parties. To provide more evidence to this unsettled debate in the empirical literature, we use data from over 400 European parties to systematically select cases of individual countries. We augment this with a cross-country quantitative study. Our analysis finds little evidence that immigrant populations are related to changes in voting for the right. Our finding gives evidence that factors other than immigration are the true cause of rises in right voting.
    Keywords: European Union, immigration, voting
    JEL: J15 F22
    Date: 2021–03
  14. By: Daniela Fantozzi (ISTAT Italian National Institute of Statistics); Alessio Muscarnera (Università di Roma "Tor Vergata")
    Abstract: In this paper we investigate the effect of a "news-based" policy shock on consumption and investments. To this aim, we construct a new measure of policy announcements, the Policy News Index (PNI), analyzing textual data from the most important Italian business newspaper (Il Sole 24 Ore). To disentangle news and noise from fiscal policy communication, we provide measures of newspaper coverage of policy announcements purged from uncertainty. Using a BVAR, we estimate the response of households and firms to a news on government spending. Results indicate that the "news" or "foresight" shock has delayed effects on government spending, consumption and investments. Agents receive mixed signals from newspapers about changes in government spending and they do not react before changes are fully in place due to a "lack of trust". Additionally, we show in a counterfactual exercise that the "confidence channel" plays a crucial role in in the transmission of the shock. Hence, our results provides evidence that outcomes are expectations-driven.
    Keywords: News-based index, Textual data, Text mining, Fiscal foresight, Agents’ expectations, BVAR.
    JEL: C32 C81 D80 E62
    Date: 2021–03–11
  15. By: Dimitris Papageorgiou (Bank of Greece); Stylianos Tsiaras (European University Institute)
    Abstract: This paper follows the great depression methodology of Kehoe and Prescott (2002, 2007) to study the importance of total factor productivity (TFP) in the Greek economic crisis over the period 2008-2017. Using growth accounting and the neo- classical growth model, the paper shows that exogenous changes in TFP are crucial for the Greek depression. The theoretical model reproduces quite well the decline in economic activity over 2008-2013 and the subsequent period of slow recovery found in the data. Nevertheless, it is less successful in predicting the magnitude of the decline in output and the labour factor. In addition, including financial frictions and risk shocks into the neoclassical growth model, does not significantly improve the model’s performance.
    Keywords: Great Depression; Greece; Growth Accounting; DSGE
    JEL: D81 G01 G21 G33 E44 E52 E58
    Date: 2021–02
  16. By: Claire Giordano (Bank of Italy); Marco Marinucci (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: While there is a vast macroeconomic literature that singles out the main drivers of capital accumulation in advanced economies during and after the global financial and sovereign debt crises' recessionary phase, there is much less research seeking to identify both models and variables that possess out-of-sample forecasting ability for gross fixed capital formation. Moreover, micro-founded variables are scarcely employed in macroeconomic forecasting of real investment. We fill this gap by considering a battery of univariate and multivariate time-series models to forecast investment of non-financial corporations in Italy, an interesting case-study due to its steep downturn during the two afore-mentioned crises. We find that a vector error correction model augmented with firm survey-based variables accounting for business confidence, demand uncertainty and financing constraints generally outperforms the autoregressive benchmark and a series of competing multivariate time-series models in various, alternative, evaluation samples that take into account the impact of both the global financial crisis and the sovereign debt crisis on forecast accuracy.
    Keywords: Real investment, forecasting evaluation, firm survey data, vector error correction model
    JEL: C32 C52 E22 E27
    Date: 2021–02
  17. By: Panagiotis Lazaris (Bank of Greece); Anastasios Petropoulos (Bank of Greece); Vasileios Siakoulis (Bank of Greece); Evangelos Stavroulakis (Bank of Greece); Nikolaos Vlachogiannakis (Bank of Greece)
    Abstract: A core input in performing a regulatory stress test is the evolution of interest rates, as it affects the income generated from the assets’ side and the expenses from the liabilities’ side. In this work, we apply an autoregressive model with distributed lags (ADL) to quantify the pass through rates, that is, the degree and speed of incorporation of the changes of money market rates by banks into their customers deposit and loan rates. In doing so, for the liabilities’ side, we differentiate between open and term deposits, as well as between households and non-financial corporates. Our results indicate that for term deposits the long-term pass through rate is very high, exceeding 91% for non-financial corporate customers and 81% for households. For open deposits, the pass through rate dynamics appear less prevalent, amounting to 21% for non-financial corporate customers and 16% for households. When exploring the pass through rate dynamics in the assets’ side of the banks, we observe full long-term pass-through of money market rates, for mortgage and consumer loans. By contrast, the non-financial corporate loans rate is stickier and less reactive to money market rates changes, with long-term pass-through adjustment being approximately equal to 40%. Furthermore, our results provide evidence that the Greek sovereign spread movement has practically negligible pass through rate both for loan and deposit products. In particular, it hardly affects the pricing of new term deposits, with a pass through rate of around 5%. This finding can be attributed, among others factors, to the fact that the Greek sovereign credit spread has approached several times non-tradable territories, which makes it an insignificant variable in determining customer rates.
    Keywords: interest rate pass-through; bank products; stress testing.
    JEL: G14 G17 C22
    Date: 2021–02
  18. By: Alexander Chudik; Kamiar Mohaddes; Mehdi Raissi
    Abstract: This paper uses a threshold-augmented Global VAR model to quantify the macroeconomic effects of countries’ discretionary fiscal actions in response to the Covid-19 pandemic and its fallout. Our results are threefold: (1) fiscal policy is playing a key role in mitigating the effects of the pandemic; (2) all else equal, countries that implemented larger fiscal support are expected to experience less output contractions; (3) emerging markets are also benefiting from the synchronized fiscal actions globally through the spillover channel and reduced financial market volatility.
    Keywords: TGVAR, Covid-19, threshold effects, fiscal policy
    JEL: C32 E44 E62 F44
    Date: 2021–03
  19. By: Aleksandar Vasilev (Lincoln International Business School, UK.)
    Abstract: We introduce firing costs into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the importance of such labor market frictions for cyclical fluctuations in Bulgaria. Firing costs decrease employment volatility and pro-cyclicality, where both effects come at odds with data. Besides those, we do not find other important effects of firing costs for business cycle fluctuations in Bulgaria.
    Keywords: business cycle fluctuations, labor markets, firing costs, Bulgaria.
    JEL: E24 E32
    Date: 2021–03
  20. By: Hochmuth, Brigitte (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and Institute for Advanced Studies Vienna, Austria (IHS)); Kohlbrecher, Britta (Friedrich-Alexander University of Erlangen-Nürnberg (FAU)); Merkl, Christian (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and IZA); Gartner, Hermann (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and Institute for Employment Research (IAB))
    Abstract: This paper proposes a new approach to evaluate the macroeconomic effects of the “Hartz IV” reform, which reduced the generosity of long-term unemployment benefits. We propose a model with different unemployment durations, where the reform initiates both a partial effect and an equilibrium effect. We estimate the relative importance of these two effects and the size of the partial effect based on the IAB Job Vacancy Survey. Our approach does not hinge on an external source for the decline in the replacement rate for long-term unemployed. We find that Hartz IV was a major driver for the decline of Germany’s steady state unemployment and that partial and equilibrium effect were nearly of equal importance. In addition, we provide direct empirical evidence on labor selection, one potential dimension of recruiting intensity.
    Keywords: Unemployment benefits reform, search and matching, Hartz reforms
    JEL: E24 E00 E60
    Date: 2021–03
  21. By: Maria Demertzis; Nicola Viegi
    Abstract: We thank Lionel Guetta-Jeanrenaud for excellent research assistance and Faÿçal Hafied for drawing our attention to ESOPs. We are grateful to seminar participants at Bruegel for comments and suggestions. This research has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement no. 822390. In both Europe and the United States, interest rates have been declining for more than fifteen years. For much of this...
    Date: 2021–03
  22. By: Olivier J Blanchard (Peterson Institute for International Economics); Ã lvaro Leandro (CaixaBank Research); Jeromin Zettelmeyer (Peterson Institute for International Economics)
    Abstract: The European Union’s fiscal rules have been suspended until at least the end of 2021. When they are reinstated, they will need to be modified, if only because of the high levels of debt. Proposals have been made—and more are to come—suggesting various changes and simplifications. Blanchard, Leandro, and Zettelmeyer take a step back and discuss how one should think about debt sustainability in the current and likely future EU economic environment. They argue that, given the complexity of the answer, it is an illusion to think that EU fiscal rules can be simple. But it is also an illusion to think that they can ever be complex enough to accommodate most relevant contingencies. Instead, the authors propose abandoning fiscal rules in favor of fiscal standards, i.e., qualitative prescriptions that leave room for judgment together with a process to decide whether the standards are met. Central to this process would be country-specific assessments using stochastic debt sustainability analysis, led by national independent fiscal councils and/or the European Commission. Disputes between member states and the European Commission on application of the standards should preferably be adjudicated by an independent institution, such as the European Court of Justice (or a specialized chamber), rather than by the Council of the European Union.
    Keywords: interest rates, fiscal policy, public debt, primary balance, fiscal deficit, fiscal rules, fiscal governance, fiscal standards, debt sustainability analysis
    JEL: E62 F42 H60 H61 H62 H63
    Date: 2021–02

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