Case studies on Germany and France public finances

ECB conducted a workshop on the topic- Public Finance Workshop Challenges for fiscal sustainability in the EU. I came across an interesting paper by Peter Wierts of Netherlands central bank. 

In the paper he looks at how these two countries have fared in public finances pre EMU and post EMU. And then whether these two countries follow a rule or are discretionary towards their fiscal policies? 

In nutshell, Germany  follows rules but France is more discretionary . Germany has had a painful history of spiralling deficits and hyperinflation and therefore is more cautious. 

We study the signals that fiscal policies and institutional reforms give about underlying preferences for policy conduct in Germany and France. Results for a wide range of indicators mostly – but not always – confirm a first intuition that preferences are tilted towards rules in Germany, and towards discretion in France. At the same time, our case study also suggests that preferences are not fixed, and that fiscal policies and institutions may change as a result. In recent years, ongoing unsustainable debt developments seem to have inspired the introduction of stricter national fiscal rules both in Germany and France. It remains to be seen how constraining recent innovations in national fiscal rules will turn out to be in the course of the fiscal exit. 

More details: 

In this paper, we have investigated the signals that national fiscal policies and institutions give about underlying preferences for the conduct of fiscal policy. If anything, ex post fiscal data seem to signal a stronger preference for constraining expenditure growth in Germany than in France, and stronger preferences for discretionary countercyclical policy in France. Real time data suggest that national fiscal plans have been more constraining in Germany than in France. Positions taken regarding the EU fiscal rules indicate preferences for a rules-based approach in Germany (except during the revision of results for most of the indicators confirm a first intuition that preferences are tilted more towards a rules-based approach in Germany, and towards discretion in France.  

Our results however also suggest that preferences are not fixed, and that fiscal policies and institutions may change as a result. In Germany, ongoing unsustainable debt trends led to preferences for and agreement on a stronger national constitutional rule. But also in France, actual fiscal developments seem to have inspired reforms in the national institutional setting, making the system somewhat more rules based. Are a result, we could argue that there is merit in the argument that disciplined countries introduce stricter rules, but that it is not the whole story. In addition, unsustainable fiscal developments may lead to an evolution of preferences towards addressing the unsustainable trend, and stronger rules in response. 

At the same time, it remains to be seen how constraining recent innovations in fiscal rules will turn out to be in the course of the fiscal exit. In recent months, it has sometimes been argued that differences in approach in Germany and France regarding the fiscal exit could jeopardise the credibility of both the fiscal exit and the SGP. We are more inclined to give a positive interpretation, however. Thanks to their differences in approach,Germany and France have played complementary roles at EU level, and acted in different ways: Germany by taking the lead in introducing the EU fiscal rules, and France by taking the lead in organising a discretionary response to the economic crisis. Moreover, in cases where German proposals tilted too much towards rules, or French proposals too much towards discretion, there was always the need to compromise with each other and strike a balance. We like to think that, in a world of uncertainty, differences in approach, learning from each other, as well as learning from experience can over time only lead to better policies.  

Useful insights into the two major economies of EMU.

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10 Responses to “Case studies on Germany and France public finances”

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