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Fiscal stabilization in the euro area
This document discusses fiscal stabilization in the euro area. It contains the following key points: 1) Many euro area countries had high debt levels compared to their economic output prior to the global financial crisis, leaving them with little fiscal space to respond to economic downturns. 2) Countries that experienced large negative output gaps during the crisis period tended to have higher public debt levels. 3) A moderately sized central fiscal capacity could help provide meaningful countercyclical stabilization for euro area countries in response to economic shocks. 4) Many euro area countries did not reduce debt levels sufficiently during good economic times, leaving them vulnerable when recessions occurred.
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Fiscal stabilization in the euro area
- 1. Fiscal stabilization in theeuro area Mahmood Pradhan Deputy Director, European Department OCED-France Stratégie workshop February 5, 2019
- 2. 1 Euro Area PolicyStance 0 50 100 150 200 250 Euro area United Kingdom United States Japan Gross Public Debt, 2012 (Percent of GDP) -4 -2 0 2 4 6 8 Euro area United Kingdom United States Japan Output Gap and Structural Deficit, 2013 (Percent of potential GDP) Structural deficit Output gap Source: World Economic Outlook.
- 3. 2 Few Euro AreaCountries Have Fiscal Space Fiscal Space Assessment (2017) ITA PRT ESP FRA DEU NLD Availability of financing Have sovereign bond spreads breached benchmarks in the last 3 months? 0 0 0 0 0 0 Do debt profile indicators breach benchmarks? Share of public debt held by non-residents 1 1 1 2 2 2 Change in share of short-term debt 0 0 0 0 External financing requirements (percent of GDP) 2 2 2 0 0 State of debt burden indicators Does debt level breach the benchmark during projection period? 2 2 2 2 0 0 Do gross financing needs breach the benchmark during projection period? 2 0 0 0 Desk Bottom-Line 2 2 2 2 0 0 Source: IMF staff.
- 4. 3 Countries With LargeOutput Gaps Had High Debt Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic Slovenia Spain 0 50 100 150 200 -16-14-12-10-8-6-4-20 PublicDebt Output gap Public Debt and Output Gap, 2013 (Percent of GDP) Source: World Economic Outlook.
- 5. 4 A Moderately SizedCFC Can Provide Meaningful Stabilization -7 -6 -5 -4 -3 -2 -1 0 t-4 t-2 t t+2 t+4 Impact of Large Shock on Output Gap (Percent of GDP) Without CFC With CFC 0 1 2 t-4 t-2 t t+2 t+4 Size of Fund (Percent of GDP) Build up Draw down Source: IMF staff calculations.
- 6. 5 Not Enough DebtReduction In Good Times 21 21 36 65 85 99 0 20 40 60 80 100 120 140 1970 1980 1990 2000 2010 France CEPR euro area recessions Debt 49 56 95 100 115 131 0 20 40 60 80 100 120 140 1970 1980 1990 2000 2010 Italy Government debt (percent of GDP) Source: CEPR, AMECO.