trends and future of sustainable development - TransEco

4. Fiscal sustainability in the European Union – a shattered dream?By now, the fact that the deficits – and ultimately debt-to-GDP ratios – have been permanently rising inmost developed countries since the 1970s goes into commonplace. Moreover, the financial crisis eruptedin 2007 shed light on the great importance of the requirements for more disciplinarian fiscal policy.Recent trends of fiscal performances in the developed world suggest that the era of great moderation –when the cyclical fluctuations showed significant dampening – and thus the complacency regarding theexposure to fiscal challenges have ended. More and more European countries faced serious liquidityproblem (e.g. Hungary, Latvia and Romania in 2008) and even the threats of sovereign debt crisis (Italy,Spain, Ireland, Greece and Portugal in 2010). Importantly, Reinhart and Rogoff (2011:4) alreadyconsiders the period 2007-2018 as a decade of debt.As a corollary, the question of fiscal institutions tailored towards fiscal sustainability is still relevantin the European Union where the Stability and Growth Pact has not been able to promote fiscaldiscipline throughout the Member States. The inefficiency of the Stability and Growth Pact (SGP) wasmanifested already in its lenient manner concerning the sanctions on non-complying countries such asGermany and France. Still, aiming at strengthening the SGP suffers from the lack of empirical evidencecollected by many conveying the message that the internal fiscal commitment is more likely to beeffective than the external anchoring role of the EU. It seems that SGP with an extended authority (e.g.with explicit debt rule) would have a deleterious effect on the democratic system if it wants to directlyinfluence the given taxation and spending constellation of a country. Under this angle, the strengthenedSGP will surely pose problems with regard to the transfer of sovereignty of nations. As a consequence,another way to improve the national fiscal policy is the fiscal institutionalisation at national level.Independent fiscal bodies, as complements of fiscal rules, are more likely to help the more sufficienttransfer of sovereignty by providing flexibility for countries how they want to impose tax and spend ondifferent fields under the consideration of prudent and sustainable debt management (Wyplosz, 2010).While lots of countries have introduced such institutions by nowadays, we can make a distinctionamong them according to the authorities and tasks they have. Therefore we rank the countries usingfiscal councils into 4 groups in order to decipher the councils’ potential contribution to the improvingfiscal discipline by the end of 2000s: Group 1 where the fiscal council’s tasks imply the preparation ofbinding macro forecasts for budget; Group 2 where the councils are preparing nonbinding macroforecasts for the state budget; and Group 3 where the council is responsible for monitoring the budgetperformance. In an effort to have a more comprehensive picture on the performance of countriesestablishing councils we also contemplate Group 4 countries being without such fiscal institutions. 1Chart 1 suggests that Group 4 countries seem to be in much worse fiscal conditions both in terms of thetrajectory of cyclically adjusted budget balance and general government gross debt ratio.1Group 1: Austria, Belgium, The Netherlands and Slovenia. Group 2: Denmark, Germany, France, Italy,Luxembourg, Sweden and United Kingdom. Group 3: Belgium, Denmark, Germany, Estonia, France, Italy,Lithuania, The Netherlands, Portugal and Sweden. Group 4: Bulgaria, Cyprus, Czech Republic, Finland, Ireland,Latvia, Malta, Poland, Romania, Slovakia.279