six-pack, two-pack and the fiscal compact

The Six-Pack, Two-Pack and the Fiscal Compact

Some implications for Ireland

What are they?

Six Pack:

• 5 Council Regulations and 1 Directive (In force)

Two Pack:

• 2 Council Regulations (In draft)

Fiscal Compact:

• Title III of the Treaty on Stability, Coordination and Governance (In ratification)

EU Economic Policy

• Articles 120 to 126 of the Treaty on the Functioning of the European Union (TFEU)- Part III Title VII Chapter I

• Maastricht Convergence Criteria:

The reference values referred to in [.] this Treaty are:

– 3% for the ratio of the planned or actual government deficit to gross domestic product at market prices;

– 60% for the ratio of government debt to gross domestic product at market prices.

The Stability and Growth Pact (1997)

Two Council Regulations were agreed in Dublin in early 1997 and they set out the EU approach to fiscal management and how it would operate in the common currency

1. The ‘Preventative’ Arm

– Council Regulation 1466/1997

2. The ‘Corrective’ Arm

– Council Regulation 1467/1997

The Balanced-Budget Rule

From the ‘Preventative’ Arm (1997)

Countries shall set out:

(a) the medium-term objective for the budgetary position of close to balance or in surplus and the adjustment path towards this objective for the general government surplus/deficit

Deficits in EMU

Revised Balanced-Budget Rule

Council Regulation 1055/2005:

Taking these factors into account, for Member States that have adopted the euro and for ERM2 Member States the country-specific medium-term budgetary objectives shall be specified within a defined range between – 1 % of GDP and balance or surplus, in cyclically adjusted terms, net of one-off and temporary measures.

Medium Term Budget Objectives

• “The underlying (structural) budget balance […] respects the terms of the Stability and Growth Pact, and is consistent with a medium-term objective of keeping the budget close to balance”

Ireland, Stability Programme Update, December 2005

• “There is an obligation to make annual improvements of 0.5 per cent of GDP towards structural balance after the excessive deficit has been corrected.”

Ireland, Stability Programme Update, December 2009

• “In the Irish case, the findings suggest an MTO of -½ per cent of GDP”

Ireland, Stability Programme Update, April 2010

The Structural Balance

The structural budget balance refers to the general government cyclically adjusted balance adjusted for once-off elements beyond the economic cycle.

The cyclically adjusted balance is the fiscal balance adjusted for the effects of the economic cycle.

SB = B – CB – OOM

CB = a.OG

A measure of the difference between the actual output of an economy and the potential output it could achieve when it is most efficient, or at full capacity.

-.1

-.05

0

.05

.1

Gro

wth

Ra

te

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: CSO

Growth in Irish Real GDP 1971 to 2010

Economic Growth

-6

-3

0

3

6

9

12

Gro

wth

Ra

te

1994 1997 2000 2003 2006 2009 2012

OECD

IMF

EC

Source: CSO

Deviations of actual GDP from potential GDP as a per cent of potential GDP

Output Gaps

-15

-10

-5

0

5

Pe

rcen

t

2002 2003 2004 2005 2006 2007 2008 Source: IMF, World Economic Outlook

Structural Budget Balance, % GDP

Structural Balances

IMF 2007

IMF 2011

Composition of Budget Balance

-.06

-.03

0

.03

Gro

wth

Ra

te, P

rop

ort

ion

of G

DP

0 5 10 15 20 25

Deficit Structural Output Gap

Pattern of Budget Deficits under Structural Deficit Rule

Budget Deficits

Achieving the Structural Deficit Target

Council Regulation 1055/2011:

The Council, when assessing the adjustment path toward the medium-term budgetary objective, shall examine if the Member State concerned pursues the annual improvement of its cyclically-adjusted balance, net of one-off and other temporary measures, required to meet its medium-term budgetary objective, with 0,5 % of GDP as a benchmark.

The Council shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort may be more limited in economic bad times.

The 60% of GDP Debt Limit

From Article 126 of the TFEU:

the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.

Government Debt in EMU

The Numerical Debt Reduction Benchmark

The Six Pack introduces numerical benchmark for what will we deemed a “satisfactory pace” of debt reduction.

The is the “one-twentieth” rule:

Countries should reduce the excess of the debt ratio over the reference value at an average of one-twentieth per year as a minimum.

Can Ireland comply with the Debt Brake?

What is not in the Fiscal Compact?

1. Government Expenditure Rule:

- Council Regulation 1175/2011

2. Macroeconomic Imbalance Procedure:



Government Expenditure Rule

… “for Member States that have achieved their medium- term budgetary objective, annual expenditure growth does not exceed a reference medium-term rate of potential GDP growth, unless the excess is matched by discretionary revenue measures;”

Macroeconomic Imbalance Scorecard

Conclusion

• Six-Pack Directive:– Put (some of) the SGP fiscal rules into national law

• Six-Pack Regulations:– Increased monitoring of balanced-budget rule and increased

involvement with EDP countries to correct excessive deficits

– Allow entry to EDP because of non-reducing debt ratio (1/20th rule)

– Establish Macroeconomic Imbalance Procedure and Government Expenditure Rule

• Two-Pack Regulations:– Further increased monitoring and surveillance of EDP and ‘Programme’

countries

– Establish ‘independent’ fiscal council

• Fiscal Compact:– Introduced because countries would not follow Germany and put ‘debt

brake’ into national constitutions.

– Would the Fiscal Compact have prevented the crisis?

– Will the Fiscal Compact solve the crisis?

Aggregate Eurozone Budget Balances

Year Overall Deficit Structural Deficit2007 -0.6% -1.7%2008 -0.6% -2.4%2009 -6.3% -4.3%2010 -6.0% -4.0%2011 -4.3% -3.0%2012 -3.5% -2.6%

six-pack, two-pack and the fiscal compact

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