Fiscal Challenges in Europe

Friday, February 20

Speakers
Mr. Torsten Arnswald, Head of Fiscal Policy Division, Federal Ministry of Finance, Germany
Mr. Paolo Manasse, Professor of Economics, University of Bologna, Italy

Chair
Mr. Norbert Funke, Director, Joint Vienna Institute

Summary
On February 20, the Joint Vienna Institute hosted a policy discussion on “Fiscal Challenges in Europe.” Mr. Torsten Arnswald from the German Federal Ministry of Finance and Professor Paolo Manasse from the University of Bologna in Italy presented their views on the current fiscal situation in the European Union and the challenges ahead.  

Mr. Arnswald began by acknowledging how much progress European economies have made in recent years in achieving better fiscal outcomes and a more favorable macroeconomic environment. As areas still to be dealt with, however, he cited high levels of debt, both public and private; low competitiveness; and poor implementation of institutional rules. Mr. Arnswald emphasized that further fiscal consolidation should go hand in hand with structural changes, and that reforms could help European governments tackle inefficiencies in labor and product markets, improve market regulation, and enhance the quality of public services. He also recommended that the new investment plan for Europe have a clear focus on the quality of investment projects and their sustainability.  The example of Germany would show that increased public investment could be accompanied by fiscal consolidation. 

While supporting the current fiscal regime in Europe and its clear fiscal rules, Mr. Arnswald emphasized the need for more determined political commitment and better governance. He noted that fiscal union in Europe remained a long-term project. The Eurozone, he suggested, would benefit from more clear-cut institutions and mechanisms, more bottom-up solutions, and more emphasis on privatization and creating a favorable environment for private investment.

Prof. Manasse summarized his latest research on fiscal convergence in Europe. He found that in recent years stronger fiscal convergence had led to economic divergence among European economies— while as a group EU countries have made good progress in fiscal consolidation, the macroeconomic challenges they currently face are different; divergences in unemployment levels, growth rates, and investment positions have come to the fore. Prof. Manasse argued, for instance, that the economic data support the evidence that countries that grew fast in 2008 have continued to grow fast since the crisis, while in those that had low growth rates, growth has not sped up. He attributed this divergence a least in part to the current fiscal framework within Europe. His empirical investigations support the idea that in Europe fiscal policy was mainly procyclical and thus led to diverging economic performance in countries within the Eurozone.

Prof. Manasse agreed on the importance of the structural reforms recommended in the New Guidelines of the Stability and Growth Pact but doubted that the new investment plan would be effective. In his view, there is a need for promoting private rather than public investment. Moreover, undergoing the Excessive Deficit Procedure in a number of countries would be an obstacle to the realization of the investment plan.

The presentations were followed by a Q&A session. One major audience concern was the cost of reforms for the society and the public finance, and how reforms then could help fiscal consolidation. Both speakers agreed that the reforms were needed and could come with significant social and political costs. However, in the longer run these potential costs would be compensated by the elimination of major market inefficiencies and rigidities.

Asel Isakova

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