Contenu du sommaire : Economic Policies in the Euro Area after the Crisis

The German general government recorded a surplus for the fourth year in a row in 2017. The fast consolidation after the Great Recession coincided with the transition period for the full introduction of the federal debt brake. At the same time Germany's economy is performing better than those of many other countries. Therefore it is nearly impossible to overrate the symbolic power of the debt brake as a seeming success story. We scrutinise this story by carrying out a comparative analysis of the “structural” consolidation of public finances in Germany for the period from 1991 until 2017, showing that the German debt brake is not the cause of the successful budget consolidation since 2010. The improvement of the general government finances since 2010 was smaller than in previous consolidation phases and was strongly supported by both a favourable macroeconomic environment and one-off effects. Finally, without the blessing of a strong upswing, Germany would hardly have become the fiscal role model for Europe, and the German debt brake would not have become the blueprint for the European Fiscal Compact.

Output gaps (OG) identify economic cycles. A new simple method for estimating them is presented, giving results that are more transparent than those published by the leading economic policy institutions. The retroactive changes to the OGs as such do not indicate that they would have been incorrect. Instead, they depend on what happened afterwards, including changes in the policies implemented. After the Great Crunch of 2008-09, fiscal policy was tight, notably in 2011-13 in the euro area, contributing to an unexpected fall in GDP, which led to large retroactive corrections of the OG estimates for earlier years. A more nuanced interpretation is that the retroactive corrections stemmed from the unduly tight fiscal policy followed in 2011-13. The new OG estimates explicitly based on an assessment of the possible changes in the long-term growth prospects provide the rudiments for a fiscal policy that both rationally copes with short term disturbances and underlines the policy measures necessary for long-term sustainability. This could help to avoid pro-cyclicality of fiscal policy in the euro area in future.

For almost 20 years, euro area countries have been sharing a single currency. The drawbacks of the euro area framework were highlighted by the widening of imbalances prior to the 2007 financial crisis, and thereafter by the huge impact of the financial crisis, the public debt crisis in Southern European countries, and the Great Recession. Prior to and after the crisis, EU institutions and Member States (MS) have not been able to implement either a common economic strategy or satisfactory economic policy coordination. This led neither to a bursting of the euro area, nor to a substantial change in its functioning. Euro area institutions were adapted, through the European Stability Mechanism, the Fiscal Treaty, the “first semester”, the European Central Bank's support to MS, and the banking union. These adaptations were painful. In mid-2018, the economic situation had clearly improved at the euro area level. However, the following question remains unsolved: can the functioning of the euro area be improved, accounting for divergent situations, interests and views in MS?The paper recalls proposals from EU institutions and from MS. We present and discuss a number of proposals made by economists to improve the euro area policy framework: relying on financial markets to control domestic economic policies, introducing a euro area budget and a minister of finance, moving towards a federal EU with increased democracy, and last, improving economic policy coordination.

The large Public Sector Purchase Programme (PSPP), which the ECB started in 2015 for monetary policy purposes, had major side effects on fiscal policy. One concerns the programme's uncommon seigniorage effects. We find that the PSPP not only led to partly negative seigniorage gains, but also produced super-seigniorage gains resulting from negative interest rates on the excess reserves that were created by the programme. Another effect of the PSPP is its interference with fiscal debt management, thereby making fiscal budgets more vulnerable to changes in short-term interest rates. Finally, the experience with the PSPP suggests that fiscal policy should prepare for a greater role in fighting future recessions.

Empirical evidence shows that a financial distress, faced by a bank or the whole economy, might cause large-scale withdrawals of deposits even when bank deposits are protected by deposit insurance, implicitly or explicitly guaranteed by a government. Building on Kiema and Jokivuolle (2015), we present a new model of such partial bank runs. In our model withdrawals are caused by the fear that both the bank and the government's deposit guarantee might fail in the future. Our focus is on a guarantee rather than on insurance, since the assets of deposit insurance funds might not be sufficient in large-scale systemic crises. Guarantee failure is possible because, being sovereign, the government may choose not to keep its promises. This option causes a fixed welfare cost (e.g. a reputational cost), which in a sufficiently severe crisis may be smaller than the costs from deposit guarantee payments. We also assume that, being welfare-maximizing, the government recapitalizes the bank during the early stage of the bank run. When decisions concerning deposit guarantee payments are made, recapitalization costs are already sunk costs, but the partial bank run has reduced the coverage costs that the remaining deposits might cause for the government. In this way, the depositors who withdraw funds during a partial bank run decrease the danger of a deposit guarantee failure and increase the incentives of the remaining depositors to keep their deposits in the bank. We apply our framework to the European Deposit Insurance Scheme (EDIS), and we view the reliability of the Single Resolution Fund and its backstop as the counterpart to the reliability of the government's promises. It turns out that in an asymmetric shock that affects only a single eurozone country, the EDIS improves bank stability, but its effects might be ambiguous in a systemic crisis that affects the whole Banking Union.