Objectives
The present paper examines if national debt brakes prove effective in reducing current account imbalances in the European Monetary Union (EMU). In the wake of the Euro crisis, EMU leaders have implemented several reform measures such as strengthening the rules of the Stability and Growth Pact (SGP). In particular, the implementation of national fiscal rules such as the German debt brake is encouraged. These reforms are driven by the perception that government profligacy is the main culprit of the current crisis. However, since the launch of the Euro persistent current account imbalances have built up in the EMU. From the theory of optimum currency areas one can infer that due to different national systems such as labor market institutions and legal systems political or economic shocks such as the German Hartz-IV reforms have hit member countries of the EMU asymmetrically. One reason that exogenous shocks have not been absorbed sufficiently so far, has been the rather pro-cyclical stance of national fiscal policies under the current SGP (Dullien/ Schwarzer, 2009).[1] Therefore, Dullien/Schwarzer (2009), along with other authors, propose the implementation of automatic fiscal stabilizers at the European level. Research findings show that in contrast to the SGP, debt brakes allow for a better working of automatic stabilizers (Colombier, 2006).[2] Thus, debt brakes might render more political unification unnecessary. Therefore, this present paper raises the question whether the implementation of national debt brakes is an effective mean to fight off divergent economic developments in the EMU. An empirical analysis is carried out that focuses on the impact of national fiscal policies on current-account balances in the EMU. Based on these estimations it is simulated how the implementation of the debt brake would have affected the development of the current account balances in Germany and the so-called GIPS countries since the launch of the Euro.[3]
Data/ Methods
Data of the Ameco database of the European Commission are used. The data set covers the GIPS countries. The time runs from 1992 to 2008. A cointegration approach is applied. To deal with endogeneity two-stage-least-squares estimations are run.
Results/ Expected Results
It is expected to show that due to the implementation of national debt brakes fiscal policies of EMU members become more anti-cyclically. This reduces divergent economic developments in the EMU to some extent. However, an EMU-wide introduction of the debt brake cannot substitute for the delegation of some national fiscal responsibilities to the European level.
[1] Dullien, S., Schwarzer, D. (2009) Bringing Macroeoconomics into the EU Budget Debate: Why and how?, Journal of Common Market Studies, 47(1), 153-174.
[2] Colombier, C. (2006) Does the Swiss Debt Brake Outperform the New Stability and Growth Pact in Terms of Stabilising Debt and Smoothing the Business Cycle?, Schmollers Jahrbuch - Journal of Applied Social Science Studies, 126(4), 521-533. (published in German)
[3] The GIPS countries include Greece, Italy, Ireland, Portugal and Spain.