Monetary Policy and the Economy Q4/11

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• Monetary Policy and the Economy Q4/11 (PDF, 2.5 MB) December 2011.

Studies and Analyses

• Crisis of Confidence to Trigger Marked Slump in Growth in 2012 (PDF, 1.5 MB) Fenz, Schneider. Fenz, Schneider – Monetary Policy and the Economy Q4/11 en Dec 31, 2011, 12:00:00 AM

• Editorial (PDF, 591 kB) Köhler-Töglhofer – Monetary Policy and the Economy Q4/11 en Dec 31, 2011, 12:00:00 AM

• Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions (PDF, 1.3 MB) Gloggnitzer, Lindner. Gloggnitzer, Lindner – Monetary Policy and the Economy Q4/11 The institutional framework and the tools for economic governance provided by the Treaty of Lisbon were inadequate for preventing or resolving the recent banking and sovereign debt crisis in the EU. For instance, the Treaty did not provide any instruments for stabilizing euro area finances, and the existing economic governance instruments, such as the Stability and Growth Pact or the Broad Economic Policy Guidelines, were not applied adequately by the Member States. In addition, the institutional decision-making procedures foreseen by the Treaty proved too sluggish during the crisis. Therefore, most of the measures taken to remedy the situation were agreed through intergovernmental decision-making, with the European Council evolving as the key player in the governance process, rather than through standard EU procedures (with the “Community Method”). The deepening of euro governance, alongside the EU governance framework, resulted from the fact that the euro area required a coherent and efficient economic governance structure. The willingness to offer financial solidarity within the euro area correlates with the willingness of distressed Member States to implement sustainable national fiscal policies. To ensure the long-term success of the euro, the euro area will, however, have to adopt a common overall strategy that adds more value to its economic success as an entity. en EU economic governance reform, financial stabilisation, Treaty of Lisbon, intergovernmental decision G01, N14, O52 Dec 31, 2011, 12:00:00 AM

• Macro Coordination under the European Semester (PDF, 1.1 MB) Köhler-Töglhofer. Köhler-Töglhofer, Part – Monetary Policy and the Economy Q4/11 To reinforce ex ante coordination of EU Member States’ economic and fiscal policies, a new monitoring cycle has been introduced: the “European semester” – a six-month period every year during which national budgetary and structural policies will be reviewed to detect any inconsistences and emerging imbalances while major budgetary decisions are still under preparation. Technically, the European semester brings together various procedures for economic policy coordination, based primarily on Article 121 (and to lesser degrees on Articles 126, 136 and 148) of the Treaty on the Functioning of the European Union. Specifically, the reform reinforces the preventive arm of the Stability and Growth Pact, introduces a new procedure for addressing macroeconomic imbalances, and places greater emphasis on monitoring the national fiscal frameworks, identifying macrostructural growth bottlenecks and detecting macrofinancial risks in the Member States. National fiscal and economic policies will be monitored in a coordinated and integrated manner rather than separately, and national policies will be aligned with integrated guidelines. The new approach is also intended to facilitate joint discussion of important economic policy priorities at EU level, thereby ensuring complementarity of national economic policy plans through policy guidance before Member States finalize their budgets for the following year. The results of such discussions and the definition of economic and fiscal policy priorities will then be effectively reflected in national policymaking, particularly in national budgets and structural reforms. The European semester thus follows an integrative approach that moves toward comprehensive, country-specific economic surveillance, in some cases with the possibility of imposing corresponding sanctions, which is in marked contrast to the “open method of coordination” used under the Lisbon agenda. Upon implementation of the “six-pack” of economic governance rules in January 2012, the already stringent monitoring requirements will be tightened even further. en European semester, EU economic governance reform, macro coordination E6 H6, F5, H1 Dec 31, 2011, 12:00:00 AM

• Europe 2020 – A New Framework for New Growth (PDF, 1018 kB) Auböck, Burger, Mangler. Auböck, Burger, Mangler – Monetary Policy and the Economy Q4/11 The Europe 2020 strategy, as adopted by the European Council on June 17, 2010, provides the new framework for the EU’s growth and employment policy. Under the new strategy, measures and reforms should be geared toward smart, sustainable and inclusive growth. The design of the new strategy was influenced heavily by the weaknesses of the Lisbon agenda (the predecessor to Europe 2020) and the compounded economic policy challenges arising from the crisis: The definition of quantitative targets at an early stage and transparent monitoring mechanisms will facilitate surveillance of implementation. For the first time, country- specific growth bottlenecks have been identified, in cooperation with the Member States, and these bottlenecks must be addressed with suitable measures. The strategy’s focus on enhancing employment, the knowledge base, competitiveness, energy efficiency and social inclusion have concentrated efforts on the most important supply-side growth factors. The EU’s new economic governance is designed to ensure the efficient coordination of national policies. All of these aspects will have a decisive impact on Austrian economic policy in the coming years. en Europe 2020, Lisbon strategy, European semester, structural reforms, financial crises O52, E61, E65 Dec 31, 2011, 12:00:00 AM

• What to Expect from the Latest Reform of the Stability and Growth Pact (PDF, 1.3 MB) Holler, Reiss. Holler, Reiss – Monetary Policy and the Economy Q4/11 Before the crisis hit, many euro area countries had failed to create sufficient fiscal room for times of economic difficulty, which made a new reform of the Stability and Growth Pact inevitable. Above all, this most recent reform introduces an expenditure rule in the preventive arm of the pact, operationalizes the debt criterion in the dissuasive arm and imposes stricter sanctions in case of noncompliance. The reform strengthens the preventive arm by making it easier to measure compliance and launch procedures as well as by introducing symbolic sanctions. While the introduction of the debt rule certainly tightened the conditions of the dissuasive arm for highly indebted countries, it remains to be seen by how much, given the large number of exceptions. Notwithstanding the new voting procedure (which is designed to make it more likely that sanctions are in fact applied), we doubt that economically significant penalties will be imposed in the foreseeable future. en Stability and Growth Pact, fiscal rules, fiscal policy E61, E62, H60 Dec 31, 2011, 12:00:00 AM

• Prevention and Correction of Macroeconomic Imbalances: the Excessive Imbalances Procedure (PDF, 1.3 MB) Essl, Stiglbauer. Essl, Stiglbauer – Monetary Policy and the Economy Q4/11 Macroeconomic imbalances can lead to economic crises. This is especially true in a monetary union due to the restrictions it imposes on the tools available to economic policymakers. The years leading up to the outbreak of the global economic crisis were characterized by divergent macroeconomic developments within the euro area, which meant that the impact of the crisis varied from Member State to Member State and that, subsequently, unexpected challenges have arisen for the single monetary policy and coordinated fiscal and economic policy. In order to prevent such developments in future, a procedure for preventing and correcting macroeconomic imbalances, analogous to the Stability and Growth Pact, was created within the framework of the European semester. The preventive arm of the procedure is designed to detect and analyze potential macroeconomic problems. If the procedure flags up “excessive” imbalances for a Member State, the corrective arm will come into effect, under which the relevant Member States will be required to submit plans for corrective measures. If Member States then fail to comply with the recommended corrective actions, sanctions may be imposed. The new procedure constitutes a considerable boost to economic policy coordination within the EU and the euro area. Nonetheless, it has yet to prove itself in practice. en macroeconomic imbalances, competitiveness, fiscal policy, structural policy, European Union, euro area E62, F32, F55 Dec 31, 2011, 12:00:00 AM

• Crisis Financing in the EU (PDF, 1016 kB) Nauschnigg, Schieder. Nauschnigg, Schieder – Monetary Policy and the Economy Q4/11 The European financial architecture in an environment of liberalized capital markets, and the European monetary union with the euro and an effective Eurosystem on the one hand and a less developed economic union on the other hand have needed to undergo reform to build resilience to crisis. As the Stability and Growth Pact (SGP) had failed to adequately ensure the budgetary surveillance required under the EU treaties, it was revised and reinforced again in 2010 and 2011, and in addition supplemented by a new procedure designed to prevent macroeconomic imbalances. Moreover, a number of “financial assistance facilities” were created or expanded for EU or euro area countries to support them in managing crises that might result in contagion effects. The emerging difficulties of Greece created a need to ensure previously nonexistent crisis financing for euro area countries. In March 2009, the funding capacity of the EU’s balance of payments facility was raised to EUR 50 billion. Measures taken since May 2010 include the extension of bilateral loans to Greece and the creation of further financing mechanisms: the European Financial Stability Facility (EFSF: EUR 440 billion), the European Financial Stabilisation Mechanism (EFSM: EUR 60 billion) and the European Stability Mechanism (ESM: EUR 500 billion). With these mechanisms, the EU has built a framework for providing regional financial support alongside funding provided by the IMF at the global level. en EU, financial crisis, crisis financing G11, H12 Dec 31, 2011, 12:00:00 AM

• Chronology of European Initiatives in Response to the Crisis (PDF, 1.3 MB) Hajek-Rezaei. Hajek-Rezaei – Monetary Policy and the Economy Q4/11 en Dec 31, 2011, 12:00:00 AM