Lecture 7

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Questions and Answers

Which of the following is an example of an automatic stabilizer in fiscal policy?

  • Reducing income taxes
  • Increasing VAT
  • Unemployment benefits (correct)
  • Constructing a new road

What is the purpose of public administrations intervening to increase competition?

  • To reduce tax revenue
  • To increase public expenditure
  • To create market power
  • To avoid dominant market positions (correct)

What is the difference between automatic stabilizers and discretionary fiscal policy?

  • Discretionary fiscal policy requires a decision while automatic stabilizers do not
  • Automatic stabilizers are always active while discretionary fiscal policy is not (correct)
  • Discretionary fiscal policy is always active while automatic stabilizers are not
  • Automatic stabilizers require a decision while discretionary fiscal policy does not

What percentage of the EU budget will be spent on fighting climate change?

<p>30% (B)</p> Signup and view all the answers

What are the three main sources of funding for the EU budget?

<p>Custom duties, value added tax, and income tax (C)</p> Signup and view all the answers

What is the first new own resource introduced to complement Member States' contributions to the EU budget?

<p>A new contribution based on non-recycled plastic packaging waste (B)</p> Signup and view all the answers

What is the purpose of the Recovery and Resilience Facility (RRF) programme?

<p>To provide financial support for public investments and reforms in Member States (B)</p> Signup and view all the answers

Which of the following criteria were used to divide the grant component of the RRF among EU countries?

<p>GDP per capita, unemployment levels, population, and impact of the coronavirus crisis (A)</p> Signup and view all the answers

How is the NextGenerationEU instrument being funded?

<p>The Commission is borrowing on the capital markets on behalf of the EU for up to around €800 billion (A)</p> Signup and view all the answers

What is the main goal of the Stability and Growth Pact (SGP)?

<p>To ensure sustainability of public budget compatible with flexibility to respond to economic crisis (D)</p> Signup and view all the answers

What is the purpose of the Excessive Deficit Procedure (EDP)?

<p>To make permanent the 3 percent deficit and 60 percent debt ceilings (B)</p> Signup and view all the answers

What is the consequence of a country not following the recommendations of the Corrective Arm of the SGP?

<p>The Council will impose a sanction by QMV (B)</p> Signup and view all the answers

What is the Multiannual Financial Framework (MFF)?

<p>A long-term budget for 7 years (C)</p> Signup and view all the answers

What was the EU's government deficit-to-GDP ratio in 2022?

<p>-3.4% (A)</p> Signup and view all the answers

What was the general government debt relative to GDP in the EU in 2022?

<p>84.0% (A)</p> Signup and view all the answers

What are the four spillovers identified by the founders of the euro in terms of fiscal policy externalities?

<p>Capital outflow, exchange rate and stock market collapse, debt monetization, and fiscal indiscipline. (C)</p> Signup and view all the answers

What are the problems of fiscal policy?

<p>Slow implementation, low effectiveness, and high public debt. (C)</p> Signup and view all the answers

What is the size of the general government sector in the EU and what does it include?

<p>It includes all levels of government, from central to local, and social security administrations. The size of the government in the EU was 53.0% of GDP in 2020. (C)</p> Signup and view all the answers

What is the impact of the COVID-19 crisis on the general government deficit in the EU?

<p>It caused a much larger deficit in 2020 than in 2019, equivalent to 6.8% of GDP. (B)</p> Signup and view all the answers

What are some of the reasons that may justify the application of authorisation schemes and other restrictions according to a case law of the European Court of Justice?

<p>Public security, public safety, public health, preserving the financial equilibrium of the social security system, the protection of consumers, recipients of services and workers, fairness of trade transactions, combating fraud, the protection of the environment and the urban environment, the health of animals, intellectual property, social policy objectives and cultural policy objectives. (B)</p> Signup and view all the answers

What is the consensus regarding the level of services that states should provide according to the text?

<p>States should provide a certain level of services. (B)</p> Signup and view all the answers

Which of the following is NOT a way in which public administrations intervene in economic activities?

<p>Setting prices (D)</p> Signup and view all the answers

What is the difference between automatic stabilizers and discretionary fiscal policy?

<p>Automatic stabilizers are government policies that are activated automatically in response to economic fluctuations, while discretionary fiscal policy involves deliberate government actions in response to economic conditions (D)</p> Signup and view all the answers

What is the main reason for public administrations to intervene in economic activities according to the text?

<p>To reduce economic fluctuations and stabilize the economy (B)</p> Signup and view all the answers

What was the general government deficit-to-GDP ratio in the euro area in 2021?

<p>-3.4 % (A)</p> Signup and view all the answers

What is the main problem with implementing fiscal policy?

<p>It is slow to implement (B)</p> Signup and view all the answers

What is the current general government debt relative to GDP in the EU?

<p>84.0 % (C)</p> Signup and view all the answers

What are the two arguments for retaining sovereignty in fiscal policy coordination?

<p>Heterogeneity of preferences and information asymmetries (C)</p> Signup and view all the answers

What is the purpose of the European Stability Mechanism (ESM)?

<p>To provide instant access to financial assistance programs for member states of the eurozone in financial difficulty (C)</p> Signup and view all the answers

What is the sanction imposed by the Council on a delinquent country that breaches the deficit limit?

<p>A deposit worth 0.2 per cent of the country's GDP (A)</p> Signup and view all the answers

What is the Multiannual Financial Framework (MFF)?

<p>The EU's long-term budget for 7 years (A)</p> Signup and view all the answers

What is the consequence of further non-compliance by a delinquent country with excessive deficits?

<p>Additional fines (B)</p> Signup and view all the answers

What is the percentage of the EU budget allocated to administration?

<p>7% (C)</p> Signup and view all the answers

What is the purpose of the Recovery and Resilience Facility (RRF)?

<p>To finance public investments in green and digital projects (A)</p> Signup and view all the answers

How is the NextGenerationEU instrument being funded?

<p>Through the issuance of bonds on the capital markets (A)</p> Signup and view all the answers

What are the criteria used to divide the grant component of the RRF among EU countries?

<p>Population size and GDP per capita (B)</p> Signup and view all the answers

What percentage of the NextGenerationEU will be invested in the digital transformation and what is the main goal of this investment?

<p>20%; to support the modernisation of the EU through the development of digital infrastructure and skills (C)</p> Signup and view all the answers

What is the biggest source of funding for the EU budget and how is it determined?

<p>GNI based (fourth “own resource”); determined by the gross national income of each member state (B)</p> Signup and view all the answers

What is the first new own resource introduced to complement Member States' contributions to the EU budget and when did it become effective?

<p>A new contribution based on non-recycled plastic packaging waste; effective from 1 January 2022 (D)</p> Signup and view all the answers

What is the size of the general government sector in the EU and what does it include?

<p>The general government sector includes all levels of government and social security administrations, but not public corporations. (A)</p> Signup and view all the answers

What is the difference between general government expenditures and revenues in the EU and what is the resulting deficit?

<p>In 2020, general government expenditures were 53.0% of GDP, general government revenues were 46.2% of GDP, and the resulting deficit was 6.8% of GDP. (B)</p> Signup and view all the answers

What is the purpose of the liberalization process in the EU since the 80s and what are the 'reform packages' that drive it?

<p>The liberalization process aims to provide 'services of general interest provided under a system of market competition' and is driven by 'reform packages' consisting of Regulations and Directives. (B)</p> Signup and view all the answers

What are some of the reasons that may justify the application of authorisation schemes and other restrictions according to a case law of the European Court of Justice?

<p>Public security, public safety, public health, preserving the financial equilibrium of the social security system, the protection of consumers, recipients of services and workers, fairness of trade transactions, combating fraud, the protection of the environment and the urban environment, the health of animals, intellectual property, the conservation of the national historic and artistic heritage, social policy objectives, and cultural policy objectives. (A)</p> Signup and view all the answers

Flashcards

Automatic Stabilizers

Economic policies that automatically adjust in response to economic changes, such as unemployment benefits.

Discretionary Fiscal Policy

Deliberate changes in government spending or taxes to influence the economy.

EU Budget Climate Spending

30% of the EU budget is dedicated to combating climate change.

EU Budget Funding Sources

The EU budget is funded by Member States' contributions, customs duties, and VAT-based resources.

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Carbon Border Adjustment Mechanism (CBAM)

A new EU funding source effective in 2023, aimed at contributing to the EU budget.

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Recovery and Resilience Facility (RRF)

EU program supporting recovery from COVID-19 and promoting resilience.

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RRF Grant Allocation Criteria

Grants from the RRF to countries are based on GDP, population, and unemployment rate.

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NextGenerationEU

An instrument funded by borrowing and grants to support EU recovery efforts.

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Stability and Growth Pact (SGP)

An EU framework ensuring sound public finances and coordinated fiscal policies.

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Excessive Deficit Procedure (EDP)

A mechanism addressing excessive government deficits in EU countries.

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SGP Sanctions

Sanctions imposed on nations not adhering to SGP recommendations.

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Multiannual Financial Framework (MFF)

Framework determining the EU budget over several years.

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EU Government Deficit-to-GDP Ratio

In 2022, the EU's ratio was 3.4%, indicating the government's deficit compared to GDP.

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EU Government Debt-to-GDP Ratio

In 2022, EU government debt was 88.5% of GDP, showing the level of national public debt.

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Fiscal Policy Spillovers

Fiscal policy externalities identified include default, inflation, unfair competition, and instability.

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Fiscal Policy Problems

Issues include time inconsistency, free riding, and macroeconomic instability.

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General Government Sector Size

Includes all public entities, accounting for around 45% of the EU's GDP.

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COVID-19 Impact on Fiscal Policy

The pandemic caused a significant increase in the general government deficit in the EU.

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Public Administration Intervention

Governments act to correct market failures, provide public goods, and redistribute income.

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European Stability Mechanism (ESM)

A mechanism providing financial assistance to financially distressed EU countries.

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Sanctions for Deficit Breaches

Fines for countries breaching deficit limits can be up to 0.2% of GDP.

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Non-compliance Consequences

Further non-compliance may lead to additional sanctions and fines for countries.

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EU Budget Administration Allocation

Approximately 6% of the EU budget is allocated to administration expenses.

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EU Liberalization Process

Aiming for economic efficiency and competition through deregulation, privatization, and trade liberalization.

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Study Notes

Fiscal Policy and EU Budget

  • An example of an automatic stabilizer in fiscal policy is unemployment benefits, which increase during recessions and decrease during economic booms.
  • Public administrations intervene to increase competition to promote economic efficiency and innovation.
  • The main difference between automatic stabilizers and discretionary fiscal policy is that automatic stabilizers respond automatically to changes in the economy, whereas discretionary fiscal policy requires a conscious decision by policymakers.
  • 30% of the EU budget will be spent on fighting climate change.
  • The three main sources of funding for the EU budget are Member States' contributions, customs duties, and VAT-based resources.
  • The first new own resource introduced to complement Member States' contributions to the EU budget is the Carbon Border Adjustment Mechanism (CBAM), which became effective in 2023.
  • The purpose of the Recovery and Resilience Facility (RRF) programme is to support EU countries in their recovery from the COVID-19 crisis and promote economic resilience.
  • The grant component of the RRF is divided among EU countries based on their GDP, population, and unemployment rate.
  • The NextGenerationEU instrument is being funded through a combination of borrowing and grants from the EU budget.

Stability and Growth Pact (SGP)

  • The main goal of the SGP is to ensure that EU countries maintain sound public finances and coordinate their fiscal policies.
  • The Excessive Deficit Procedure (EDP) is a mechanism to correct excessive government deficits in EU countries.
  • The consequence of a country not following the recommendations of the Corrective Arm of the SGP is the imposition of sanctions and fines.
  • The Multiannual Financial Framework (MFF) is a framework that sets the EU's budget for a period of several years.

EU Economic Indicators

  • The EU's government deficit-to-GDP ratio in 2022 was 3.4%.
  • The general government debt relative to GDP in the EU in 2022 was 88.5%.
  • The four spillovers identified by the founders of the euro in terms of fiscal policy externalities are the risk of default, the risk of inflation, the risk of unfair competition, and the risk of macroeconomic instability.
  • The problems of fiscal policy include time inconsistency, free riding, and the risk of macroeconomic instability.
  • The size of the general government sector in the EU includes all public entities, including central government, local government, and social security funds, and accounts for around 45% of the EU's GDP.
  • The COVID-19 crisis led to a significant increase in the general government deficit in the EU.

Public Administration and Fiscal Policy

  • Public administrations intervene in economic activities to correct market failures, promote public goods, and redistribute income.
  • The main reason for public administrations to intervene in economic activities is to correct market failures.
  • The European Stability Mechanism (ESM) is a mechanism to provide financial assistance to EU countries facing financial difficulties.
  • The sanction imposed by the Council on a delinquent country that breaches the deficit limit is a fine of up to 0.2% of its GDP.
  • The consequence of further non-compliance by a delinquent country with excessive deficits is the imposition of additional sanctions and fines.
  • Around 6% of the EU budget is allocated to administration.
  • The purpose of the liberalization process in the EU since the 80s is to promote economic efficiency and competition, and the 'reform packages' that drive it include deregulation, privatization, and trade liberalization.

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