Public Financial Management in the European Union

Public Finance and Global Crises

Marta Postuła

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000578300
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Öffentliche Finanzen

This book reveals how to create efficient institutions and coordinate policy on a transnational scale to ensure that European Union integration can best meet social needs. It offers a combined technocratic and humanist perspective on the discussion of public financial management. The state, as part of its public policy, should seek to preserve our social and environmental values, yet there are mounting imbalances in society which point to the growing role of the state in minimising them. Under such circumstances, it is worth reflecting on how new challenges could require updated, more complex formulas, to deal with crises in current times and for social and economic policy making by states and the European Union generally, which would ensure their compatibility with the world financial markets. The work offers an in-depth and unique performance analysis of European Union institutions compared to the national entities of EU Member States. It contributes to the ongoing debate on global public goods and the processes involved in managing their provision. Further, it discusses public finance management instruments, indicating their historical evolution in practice and their effectiveness measured with the Human Development Index. The author presents a proposal of how to manage global, European and national public goods across three areas: environmental protection, transnational infrastructure projects and social policy. The book analyses public financial management instruments used during the recent pandemic, making a distinction between regular and emergency instruments and assessing their effectiveness in specific economic situations. This will be of interest to researchers and students of economics and finance, as well as decision makers and practitioners from governments, international organisations and specific non-governmental organisations concerned with issues of public finance management.

1 Contemporary challenges to the European social and economic policy

DOI: 10.4324/9781003222033-2

Introduction

The crisis of 2007–2008 revealed a tremendous weakness of the economic policies implemented by those in power, as a result of which tackling its effects and building new solutions to mitigate the consequences of crisis phenomena in future proved to be a huge challenge to the Community as a whole. Though only 11 years have passed since the beginning of the then crisis, with its economic effects still being felt, the world has become engulfed in another crisis, one related to the Covid-19 pandemic and having significant long-term implications in the health sphere, obviously, in the socio-economic one. Two crises of such magnitude happening in quick succession have made it necessary to apply non-standard measures in the realm of social and economic policy and fiscal instruments used by the European Union and national governments.

An analysis of the situation in the European Union a decade after the financial crisis, as reflected in the European Commission’s report (European Commission, 2018a), pointed to major differences in the methods respective Member States adopted to counteract the results of the crisis. Some of them had to carry out consolidation measures as part of their fiscal policy, aimed to reduce the budgetary imbalance, while others had a certain room for implementing an active fiscal policy contributing to an improved life quality of their citizens. Such state of affairs required a varied approach to domestic fiscal policies, also taking account of the change in the respective roles played by the European Union, national authorities and administration.

The lessons learned from those experiences show that the economic policy coordination undertaken by Member States and the European Union alike may have direct or indirect implications for the fiscal policy and income distribution globally. The pandemic crisis, following which the role of the EU and national authorities in the economic life has increased beyond the established standards, has demonstrated that the aforementioned elements have intensified. In the first quarter of 2020, the European Union, in response to the Covid-19 pandemic, proposed a comprehensive package of measures including those aimed at coordinated medical action and alleviating the impact of economic consequences on individuals’ livelihoods and on the functioning of economic operators. Moreover, as a next step, a long-term EU budget was proposed to Member States, i.e. the Multiannual Financial Framework (MFF) coupled with Next Generation EU (NGEU). The resources included in those proposals can be seen as the largest stimulation package to have ever been financed in Europe. A total of EUR 1.8 trillion is expected to boost economic development post-Covid-19 in EU countries. The new EU MFF also marks a change in the approach to the way Community funds are managed, i.e. more flexible solutions are proposed in this respect to guarantee that it will be able to meet the needs that could not have been foreseen at the time of its creation.

The questions of whether and what kind of solutions for redistribution by the EU and national authorities will be optimal in a given country and what the role is of the EU in this process are hard to answer unambiguously. There is a variety of views on which tools are the most effective in policy making and implementation, and on the role of supranational organisations and associations in this respect.

The academic and public discourse, in which states are considered as economic operators in international relations, seemed to be losing relevance, but the pandemic crisis has unequivocally showed that this was a misunderstanding. A new discourse is also emerging, stressing a domestic approach to having an economic policy based on country-specific goals and interests defined within a country itself. Adding to this is a very strong post-Brexit discourse on the future of the EU and the growing need for its reform. These discussions have calmed down due to the Covid-19 outbreak, but they cannot be considered gone as they have already returned at different political, decision-making levels, the Eurosceptic community being still very active in many Member States (e.g. Poland, Hungary). Today, i.e. in 2021, the European Union is facing unprecedented geopolitical challenges as regards the direction of further changes (Hubner, 2021; van Middelaar, 2019). This is confirmed by the Conference on the Future of Europe. The platform was opened on 19 April 2021 and officially inaugurated on 9 May 2021. Moreover, it is planned that debates and civic conferences will be held as part of this initiative until mid-2022 to identify priorities expected by the Community citizens. This is an important project to the current European Commission, intended to engage societies and citizens in European affairs. In this situation, a question presents itself: Would the challenges of the new, more complex reality not require new, more complex remedies, better adapted to the circumstances at hand and to the public policy needs? Europeans will hopefully choose EU priorities for action as part of the Conference on the Future of Europe; it would be worthwhile creating efficient fiscal and redistributive tools to implement them well.

1.1 Determinants and causes of the crisis of 2007–2008

The crisis (2007–2008) of economic theories, including the one of financial tools used in the implementation of economic policy and market measures, is linked to the barriers accompanying the processes taking place, with special focus on costs of resources, the discipline imposed by climate change and fallibility of institutions, identified with the uncontrollable, happy-go-lucky and often deceitful financial system (Galbraith, 2016). This is a relatively unoriginal statement as the history of contemporary economics has recorded a number of unsurmountable crises which have occurred over the last couple of centuries. There is no capitalism without cyclicality of the macroeconomic reproduction process. Neither is there market economy without periodic crises. There is none and there will be none. This phenomenon was proved already a century and a half ago by K. Marks (Mazlish, 1972), and afterwards confirmed again by J.M. Keynes (Cutler et al., 2003). Contemporarily, the inevitability of this phenomenon is discussed, among others, by N. Roubini and S. Mihm in their publication Crisis Economics (2010).

One of the first crises pointed out by J.K. Galbraith (2016) was a crisis over the correlations between factors such as demand, employment and ownership. It was crisis that consequently led to taking measures reflected in the Keynesian revolution, and, as a next step, to those ushering in the neoclassical counterrevolution. It is worth noting that the causes of respective crises are different. The crisis of 1929–1933 was a crisis of overproduction, while the crisis which occurred in 2007–2008 was a crisis of excessive crediting. Nevertheless, both recessions proved that independent market players (whether companies or financial institutions) are not viable without adequate regulation and market coordination by national government or by a community. Its absence may be the source of asymmetry of information and of the lack of security mechanisms developed to control individual market game players.

The crisis of 2007–2008 triggered an unprecedentedly heated debate over the state of economics as a science and its actual role in decision-making and shaping economic processes. Scientists and practitioners dealing with this domain attempted in the post-crisis years to identify the causes of the situation (Bremmer, 2010; King, 2010; Legrain, 2010; Rajan, 2010; Stiglitz, 2010b; Thaler, 2008; Zakaria, 2009). In their analyses, economists tried to answer the question of whether the crisis we were dealing with back then is a sign of dysfunction of economy alone or also that of some trends of economic thought applied in practice? Some researchers put forward quite a bold hypothesis that the contemporary economics failed as, on the one hand, it did not use the correlations that could have helped predict the crisis and, on the other hand, it was unable to offer effective remedies to prevent such phenomena in future (Lin, 2012). The observably divided views among the economists following the crisis of 2007–2008 were perfectly captured by the 2008 Nobel Prize winner P. Krugman (2009) saying that the economic crisis that had claimed about 6.7 jobs in the United States demonstrated the inadequacy of the fundamental tenets of the neoclassical economics, which is based on the idea of rational investor and consumer behaviour, as well as that of the theory of finance, which relies on efficient market hypothesis. Assuming the validity of such a diagnosis of the cause of the crisis, one can conclude that the market mechanism is effective when the prices of the products offered are a very precise reflection of all publicly available information having an effect on stock valuation, and the rates of return depend on the level of risk taken by investors. When it comes to the state’s role in this process, he can see a need for government action in the economy.

Many economists (e.g. Harvey, 2007; Kołodko, 2010) believe that the source of the crisis lies in the neoliberal capitalism. They argue that the crisis could not have possibly emerged in countries with a social market economy, which functions, for example in Scandinavia; it was only possible within a neoliberal Anglo-American model. According to researchers, a crisis bringing about such a sharp shock could have only resulted from a concurrent mix of many political, social, technological and economic circumstances (Eyraud et al., 2017). A moment in which all of those factors started to interpenetrate each other, showing themselves at their worst, caused an accumulation of phenomena and processes with a crisis-generating potential. As pointed out by researchers, the confluence of those factors proved dangerous for the combination of values, institutions and economic policy typical of neoliberalism.

From the perspective of discussions presented in this Monograph, of special significance is the then ongoing debate over the limits of government intervention and the effectiveness of market mechanisms. Fiscal policy implemented by authorities can have a direct impact on the net income by designing an adequate tax and pension system. Moreover, fiscal policy can also indirectly influence income distribution via two main channels, which the EU and national authorities have tried to make use of during the Covid-19 pandemic crisis. Firstly, it can elicit behavioural responses in companies, employees and consumers, which will have an effect on economic results and market income (i.e. before tax and social insurance). For example, higher social transfers or taxes may distort incentives to work, drive up the unemployment rate and increase market imbalance (in gross income) (Wilkin, 2012; Caselli and Reynaud, 2020). Secondly, indirect effects also depend on the public finance stability as high public debt encumbers economic growth and exposes the economy to a risk of a deeper recession in the event of a financial crisis. Generally speaking, indirect results of some policies may partly compensate for the direct impact on unequal treatment. In the context of such elements of impact of state policy, it is worth reflecting on the validity of the hypothesis that neoliberal economic policy was among the main causes of the financial crisis in 2008; on what use this economic trend made of government, and whether it did at all. Such diagnosis will be useful in the next subchapter’s deliberations on the optimisation of instruments of the state, especially that following the crisis of 2007–2008 and during the Covid-19 pandemic its scope of intervention has manifestly increased in many fields.

Going back to historic times, neoliberalism as a trend in the history of economic thought and a political and economic doctrine calling into question the Keynesian theories that had been predominant since the Great Crisis of the 1930s, developed in the second half of the 20th century, reigning supreme in ...