Hrvoje Šimović

Fiscal System and Fiscal Relations in The European Union: Political Restraints and Alternative Approach to Public Finance

Development of the European integration through the European Union (EU) considers not only strengthening integration from the economic aspect (internal market). It also considers the political aspect of the integration i.e. strengthening political integration of member states and their citizens. Political segment of integration considers strengthening of the internal policies of the EU in which fiscal system, i.e. public finances have extremely important role. The EU fiscal system presents reflection of the extremely strong and often confronted interests between the economic and the political integration. These issues are closely related to the second component of the European politic and economic integration, that are the fiscal relations between the EU “central” level and the national “lower” levels which bring the all important decisions in the EU. According to the theory of public finance (fiscal federalism) and the criteria of economic efficiency, fiscal functions (allocation, redistribution, stabilization) and activities are assigned to the different levels of government, as well as certain resources for their financing. On the basis of fiscal functions carried out by national levels in the EU, and the manner of their financing, the EU is a prominently fiscally decentralized complex community. The traditional approach to the fiscal federalism that fiscal authorities are transferred from central to lover levels means that this is a process of decentralization, while in the case of the EU this means centralization of fiscal authorities from the level on national states to the EU as a supra-national level. The main goal of this paper is to analyze fiscal relations in the EU according to basic fiscal functions: allocation, redistribution and stabilization. Methodology would include analysis and comparison of positive EU aspect with normative aspect of public finances in multi-level community. Induction of gained results will confirm thesis that, because of political restraints, development of common (central) system of the EU public finances is based on alternative approaches of harmonization and cooperation.

The effectiveness of fiscal spending in Croatia, Slovenia and Serbia: the role of trade openness and public debt level

Abstract Various structural characteristics of economies, directly or indirectly, affect the transmission from government stimuli to economic activity and determine the size of fiscal multipliers. In this article, we expand the standard Blanchard–Perotti fiscal SVAR model by incorporating the public debt and trade openness variables to assess the influence of these structural determinants on the effectiveness of fiscal spending in three selected former Yugoslav countries – Slovenia, Croatia and Serbia. The results confirmed the main hypotheses, which state that public debt level and trade openness significantly affect the effectiveness of fiscal spending through the means of reduction in size of fiscal effects in all countries analysed. When comparing internationally, this reduction tends to be more evident in countries with a higher degree of average public debt level and trade openness.

Monetary and fiscal policy mix in a small open economy: the case of Croatia

In this article we use a structural vector autoregression (VAR) model to analyse the possibilities of monetary and fiscal policy in achieving main economic policy goals, namely price stability and economic growth, in Croatia from 2004 to 2012. Our main results indicate that expansionary monetary and fiscal policies both have positive effects on economic activity. On the other hand, fiscal expansion leads to nominal exchange rate appreciation while monetary expansion has depreciation effects on nominal exchange rate. Thus the main conclusion of the article is that coordinated measures of monetary and fiscal policies could achieve both goals, i.e. that fiscal and monetary authorities can stimulate economic growth without endangering price stability.

Fiscal Policy and European Semester in Croatia: Why Should We Focus on Public Debt?

In this chapter we analyze the mid-term fiscal developments in Croatia through the lens of the European Semester-related indicators, procedures and policies. We show that despite the more favorable fiscal position public debt in Croatia is still excessive when compared to SGP and Fiscal Compact rules, the level of economic development and debt levels in CEE peer countries. This is especially worrying as our empirical results confirmed the thesis that public debt level significantly affects and reduces the effectiveness of fiscal policy, the main economic policy instrument in Croatia. An extended SVAR model with public debt, compared to the baseline model, clearly shows the reduction of impact and cumulative government spending multipliers. Thus policy-makers should not only focus their efforts on further and stronger reduction of public debt only to comply with EU economic governance rules but also to mitigate the negative effects of debt burden on the effectiveness of fiscal policy in Croatia.

Impact of public debt sustainability on fiscal policy in Croatia

This paper analyses the impact of public debt level and its (un)sustainability on fiscal policy in Croatia in the 2001–2015 period. A switching regression approach is used to distinguish different regimes when government spending, i.e. fiscal policy has more or less impact on economic growth during different cycles. In the second part, the structural VAR model is used to analyse the dynamic effects of government spending on domestic demand in Croatia. To observe the public debt effects on a fiscal policy, a “closed” model is compared with an “extended” model which includes a debtto- GDP indicator. Results show a negative impact of recession on public debt sustainability and confirm the main thesis that public debt level significantly affects and reduces the effectiveness of fiscal policy in Croatia.

Restoring international competitiveness in Croatia: the role of fiscal and monetary policy

Croatia has joined the European Union as a country with several substantial structural problems, of which the most important is weak competitiveness. Although competitiveness can be viewed from the ‘institutional’ perspective, which includes World Development Indicators (WDI) and Doing Business reports, in this paper the authors focus on the more standard view of competitiveness based on unit labour costs (ULC) and real effective exchange rate (REER). As a small, open and highly dollarized/euroised economy that has to coordinate its economic policy with the EU policy framework, Croatia has limited space for increasing international competitiveness using monetary policy measures aimed at (nominal) devaluation of the national currency. Therefore economic policy stakeholders should focus on decreasing unit labour costs and real effective exchange rate mainly through the process of internal devaluation, which is based on adequate fiscal policy measures. In this paper the authors analyse the role of monetary and fiscal policy in the deteriorating real effective exchange rate and unit labour costs since 2000, and their current capabilities and restrictions in restoring international competitiveness. The Structural VAR model (SVAR) is used to estimate the effects of foreign (banking) capital, credit growth, and current public expenditure on REER and ULC. The preliminary hypothesis of the paper is that monetary policy should continue to support bank lending activities and the role of fiscal policy is to achieve an internal devaluation, which will increase the competitiveness of the Croatian economy. Restoring international competitiveness is necessary due to its impact on net exports and consequently the economic recovery of the national economy, which has faced recession conditions for five years in a row. Also, restoring competitiveness is one of the most important preconditions for the success of a small country joining the single European market.

Monetary and Fiscal Aspects of the European Union's Enlargement

With an enlargement of the European Union (EU) appear changes inside of monetary and fiscal systems of new Member States, but also appear changes inside monetary and fiscal system of the EU. Changes connected with monetary policy should be observed in context of European Monetary Union (EMU), while changes connected with fiscal system could be observed through a prism of whole EU. The main research is oriented on problems and challenges of fiscal and monetary system of the EU, and EMU, by which are currently confronted these integrations after the largest enlargement in history of EU. This paper will focus to all these issues, and try to point out key problems that occurred and can later occur inside EU fiscal and monetary systems because of enlargement.