CRS Says Revenue Losses, Not Spending Increases, Will Have a Greater Impact on U.S. Budget

The global financial crisis and economic recession spurred national governments to boost fiscal expenditures to stimulate economic growth and to provide capital injections to support their financial sectors. Government measures included asset purchases, direct lending through national treasuries, and government-backed guarantees for financial sector liabilities. The severity and global nature of the economic recession raised the rate of unemployment, increased the cost of stabilizing the financial sector, and limited the number of policy options that were available to national leaders. In turn, the financial crisis negatively affected economic output and contributed to the severity of the economic recession. As a result, the surge in fiscal spending, combined with a loss of revenue, has caused government deficit spending to rise sharply when measured as a share of gross domestic product (GDP) and increased the overall level of public debt. Recent forecasts indicate that budget deficits on the whole likely will stabilize, but are not expected to fall appreciably for some time.

The sharp rise in deficit spending is prompting policymakers to assess various strategies for winding down their stimulus measures and to curtail capital injections without disrupting the nascent economic recovery. The threat of sovereign defaults in Greece and Ireland, followed by potential defaults in Italy, Portugal, and Spain, have prompted a broad range of governments in Europe and elsewhere to develop plans to reduce the government's budget deficit. This report focuses on how major developed and emerging-market country governments, particularly the G-20 and Organization for Economic Cooperation and Development (OECD) countries, limit their fiscal deficits. Financial markets support government efforts to reduce deficit spending, because they are concerned over the long-term impact of the budget deficits. At the same time, they are concerned that the loss of spending will slow down the economic recovery and they doubt the conviction of some governments to impose austere budgets in the face of public opposition.

Some central governments are examining such measures as budget rules, or fiscal consolidation, as a way to trim spending and reduce the overall size of their central government debt. Budget rules can be applied in a number of ways, including limiting central government budget deficits to a determined percentage of GDP. To the extent that fiscal consolidation lowers the market rate of interest, such efforts could improve a government's budget position by lowering borrowing costs and stimulating economic growth. Other strategies include authorizing independent public institutions to spearhead fiscal consolidation efforts and developing medium-term budgetary frameworks for fiscal planning. Fiscal consolidation efforts, however, generally require policymakers to weigh the effects of various policy trade-offs, including the trade-off between adopting stringent, but enforceable, rules-based programs, compared with more flexible, but less effective, principles-based programs that offer policymakers some discretion in applying punitive measures.

                            Contents

The International Monetary Fund (IMF) has indicated,¹ that growing concerns over the fiscal balances, or the annual budget balance, of the economically advanced G-20² countries continue to pose a risk to economic recovery. Financial turmoil in Greece, Ireland, and in other European countries has placed increased pressure on national governments to adopt austerity measures to satisfy credit markets. At the same time, most advanced economies are navigating a fine line between fiscal austerity on one hand, and maintaining public support programs to forestall a slip back into recession on the other. Indeed, the IMF warned that renewed turbulence in the sovereign debt market, or government bond market, could "trigger an adverse feedback loop" and inflict "major damage on the recovery."

The IMF has indicated that government fiscal balances weakened by 6 percentage points of GDP between 2007 and 2009, rising from 1.9% to 7.9% of GDP. The largest impact on the fiscal balances of the advanced G-20 countries was projected to occur in 2009 and 2010. In 2009, the IMF estimated that fiscal deficits increased by 5% of GDP in 2009, another three-fourths of a percent in 2010, and 1.25% in 2011. Also, the forecast projected that government debt, or the accumulated amount of government deficits, among the advanced G-20 countries would rise on average by 14.5% of GDP by the end of 2009, compared with 2007, as indicated in Table 1.³ This forecast was considered by the IMF to represent the middle of the range of estimates, and it is based on the assumption that the economic recovery continued at the pace experienced in mid-2009.

In the same forecast, the annual budget deficits for the emerging G-20 countries were projected to widen on average from a surplus of 0.2% of GDP in 2007 to a deficit of 3.2% of GDP in 2009, while government debt was expected to remain at a constant share of GDP. For European governments, the rise in government budget deficits and the increase in the total amount of government debt is undermining their efforts to reduce the size of their annual central government budget deficits. These estimates for the growth in government debt could change, depending on the success governments have in liquidating at favorable prices the assets they acquired during the financial crisis, the timing and strength of the economic recovery, and the extent of any payout on official guarantees.

The magnitude and pervasive nature of the government deficits is unsettling international capital markets. In general, public sector debts are rising relative to national gross domestic product (GDP), the broadest measure of a nation's economic output. The international markets also have become increasingly wary of rising government deficits due to an increased perception of risk. In particular, these perceived risks are viewed as being especially high in Europe where financial institutions are exposed to economic troubles in Greece, Portugal, and Spain. According to the Bank for International Settlements (BIS) the euro area banks hold more than 70% of the outstanding public sector debt of Greece.⁴ Furthermore, the uneven pace of the economic recovery is adding to perceptions of risk.

         Table 1. Fiscal Balance and Government Debt of G-20 Countries

Austerity Measures in Europe

Concerns in credit markets and among policymakers over economic conditions in Europe, particularly the economic conditions of Portugal, Greece, Spain, and Ireland, drove the topic to the top of the agenda at the early February 2010 meeting of G7 finance ministers. In addition, the exchange value of the euro depreciated against the dollar in late 2010 amid broader concerns over the impact budget deficits are having on the larger economies in the Eurozone.⁶ Such concerns could tighten credit and raise borrowing costs for a broad number of countries. Rather than relying on the International Monetary Fund to provide loans to the four countries in the most immediate danger, the richer economies of the Eurozone, particularly France and Germany, have stepped in and provided loans and other assistance to those nations in trouble. Prospects of a default by any member of the Eurozone, however, could severely strain the cohesion of the zone and challenge some aspects of European economic integration.

The potential for insolvency in Greece, Ireland, Portugal, and Spain has increased concerns among EU members over the impact the financial crisis and the economic recession are having on the future of the Eurozone. In addition, the continuing financial and economic weaknesses are buffeting the economies of Central and Eastern Europe and raising concerns regarding the prospects for political instability⁷ and future prospects for market reforms. Moreover, the pace of economic recovery in Central and East European countries is compounding the current problems facing financial institutions in EU member states, since many of them are financially exposed in Central and Eastern Europe. Mutual necessity helped EU members agree to support a generally unified position to increase aid to Central and East European economies and to Greece. In May 2010, European leaders and institutions adopted a package of emergency measures to stem rising financial market tensions associated with concerns over the fiscal solvency of Greece and several other Eurozone countries. In coordination with the International Monetary Fund (IMF), Eurozone members announced a three-year, 110 billion Euro (about $145 billion) financial assistance program for Greece, a 60 billion Euro ($78 billion) European Financial Stabilization Mechanism (EFSM), and a 440 billion Euro (about $580 billion) European Financial Stability Facility (EFSF).

The EFSM is a new supranational EU balance of payments loan facility available from the European Commission to any EU member country facing financial difficulties. The facility is similar in design to an existing 50 billion Euro ($65 billion) EU balance of payments facility that can only be drawn on by non-Eurozone EU member nations.⁸ Since 2008, Hungary, Latvia, and Romania have borrowed from this later facility as part of a joint EU-IMF economic adjustment program. Under the new EFSM, the borrowing nation would be subject to economic austerity measures that would be supervised by the European Commission, which would decide at regular intervals whether sufficient fiscal progress has been made to warrant the continued release of funds. The funds are available immediately and there is no sunset date for the EFSM. To date, no country has requested funds from the EFSM.

On November 21, 2010, Irish officials reversed policies and asked the EU and the IMF for financial assistance to avert a financial crisis. The loans and stand-by credits are expected to be provided through the EFSM and the EFSF and could amount to 85-90 billion Euros, or about $110-$120 billion, spread over three years, with the possibility of supplemental funds provided by Britain and some other countries. Ireland is set to restructure some of its banks and to nationalize others to stem the outflow of deposits that has drained Irish banks. Irish authorities had earlier adopted income tax cuts and cuts in public sector pay and social welfare benefits to reduce the government's deficits. On November 24, 2010, Ireland's Prime Minister, Brian Cowen, announced a four-year $20 billion plan to reduce Ireland's government debt. The plan reportedly includes cuts of thousands of public sector jobs, phased-in increases in Ireland's value-added tax (VAT) rate starting in 2013, and social welfare savings of $3.7 billion by 2014, but does not touch the country's ultra-low corporate tax rate. News of the government's call for financial assistance has fractured the current coalition government and sparked public protests. The Irish crisis has rattled international investors who have been dumping Spanish and Portuguese bonds in panic selling, raising the prospects that one or both countries may need financial assistance.

Impact on Central Government Budgets

The current financial and economic crises have worsened the financial position of the central government budgets of the G-20 countries, although the impact of the crises has varied by country. The two crises are affecting the balance sheets of the central governments in three broad areas. First, governments adopted a broad range of special measures to support the financial system. Second, policymakers adopted discretionary fiscal stimulus measures to spur economic growth in order to stem the effects of the sharp drop in economic activity. Third, most economies experienced a loss in tax revenue and a surge in non-discretionary spending, referred to as automatic stabilizers, including such activities as unemployment insurance, that rise without direct legislative authorization. As a result of these factors, the financial crisis has undermined the effectiveness of budget rules as government budgets are affected by large or prolonged internal or external shocks.

Table 2 displays the combination of these three spending activities on the overall balance of G-20 countries. The data indicate that over the 2009-2010 period, the overall fiscal balance for the United States is expected to fall from -5.9% to -8.9% of GDP as automatic stabilizers kick in and as discretionary policy actions, in the form of deficit spending, increase. Additionally, the data indicate that the U.S. budget balance is being affected almost equally by automatic stabilizers, discretionary fiscal policy actions, and by other actions, including extraordinary measures, that were taken to shore up the financial sector. In comparison, Saudi Arabia and Russia experienced a double-digit deterioration in their budget balances as their government budgets shifted from running a surplus to being in deficit, due in large part to the drop in oil revenues as the price of oil fell during the economic recession. Saudi Arabia also adopted other discretionary fiscal measures that contributed to its budget deficit. Great Britain, as is the case with other G-20 members, adopted discretionary spending measures. Those measures, however, were less a factor in driving up its budget deficits than spending associated with automatic stabilizers.

              Table 2. Overall Central Government Budget Balances,

                  Table 3. Size and Timing of Fiscal Packages

According to the IMF, the current rise in government deficits for most countries does not represent an explosive upward path in spending, but represents targeted and necessary policy responses to the financial and economic crises. A rise in government debt that is directed at stemming an economic recession or a financial crisis does not necessarily undermine market confidence as long as governments can undertake credible programs to reduce spending once the crisis has been averted. With some notable exceptions such as Greece, the rise in spending generally is not viewed as representing profligate spending by central governments, but is attributed to measures to address the financial crisis, including spending on social programs that rise without overt discretionary actions. Such automatic stabilizers have an especially large impact on the spending of governments within the European Union, where the government sector accounts for a larger share of total GDP.

Fiscal Consolidation: Country Efforts

Since 1990, numerous national governments in developed countries have undertaken fiscal consolidation efforts, often by adopting a budgetary rule that restricts the size of the annual amount of the government budget deficit to a certain percentage of GDP. The reasons for fiscal consolidations are as varied as the governments themselves. Most often, policymakers are motivated to reduce the government's budget deficit due to a variety of concerns. These include: the rising pressure on public finances of aging populations; the cost of financing a rising amount of debt; the impact on price inflation; the crowding out of private investment; and the reputation and credibility of the government and its economic policies in the financial markets. Table 4 details fourteen instances between 1990 and 2005 identified by the IMF in which governments in developed countries undertook fiscal consolidation. As is indicated, these efforts generally were initiated for a short period of time and were designed to meet a specific objective. The details provided by the IMF include the political and macroeconomic environment in which the fiscal consolidation occurred and the condition of the central governments' budget. In a number of cases, budget consolidation can be associated with a change in governments in which the budget deficit was an issue in the preceding election.

The IMF concluded that successful fiscal consolidation efforts generally were accompanied by a supportive domestic and international environment, including, but not limited to, periods of sustained positive economic growth among trading partners. While fiscal consolidation generally tends to reduce the overall rate of growth in an economy in the short run due to the drop in the central government's contribution to GDP growth, the IMF authors concluded that: 1) this negative effect was not as pronounced as had been indicated in previous studies; 2) that in some cases fiscal consolidation had a positive impact on the rate of economic growth; and 3) that the long-term impact on economic growth from a reduction in central government spending depended on a range of factors, including the strength of private domestic demand.⁹ To reduce the size of the government's deficit spending, policymakers have a number of options.

These options include reducing current spending, increasing current revenue, reducing capital spending, or some combination of spending reductions and revenue increases. While the record on the economic effects of these various approaches to fiscal consolidation is mixed, a study by the OECD concluded that "spending restraint (notably with respect to government consumption and transfers) is more likely to generate lasting fiscal consolidation and better economic performance" than revenue enhancements.¹⁰ Despite this general result, the OECD study also concluded that the experiences of OECD countries was that revenue increases "accounted for a larger fraction of the total reduction,"¹¹ than did reductions in government spending. In addition, the study concluded that three-fourths of the episodes involved a combination of cuts in government expenditures and increases in government revenues. Reductions in capital spending generally played a small role in such fiscal consolidation efforts, according to the OECD study.

Recent EU Austerity Measures

As Table 5 indicates, EU member countries have adopted various tax and spending measures to reduce the size of their government budget deficit, many of which were exacerbated by the economic recession and stimulus measures adopted during the 2008-2009 financial crisis to stem the impact of the economic recession. The lingering effects of the recession are compounding the problems of EU members, because most members have large automatic stabilizers, or public support measures that are activated by economic events. Such measures include unemployment benefits and other types of social welfare spending. In many cases, governments have chosen to reduce public sector jobs or to freeze wages, because such changes usually can be adopted without legislative action. Other governments have chosen to increase the value added tax (VAT), or the tax that is applied through the various stages of production. Such taxes are less visible to consumers, because the tax is incorporated into the final cost to consumers.

Budget Rules

One approach developed countries have used to address government budget deficits has been to adopt some type of a budget rule. A study by the OECD on fiscal consolidation concluded that most developed countries have at some time adopted budget rules that restrict the amount of deficit spending to a specified percent of GDP and that constrain the overall level of the central government's debt, as indicated in Table 6. .¹² One common feature of these rules is that most of them were applied for a relatively short period of time. In contrast, members of the European Union (EU), which account for half of the total number of developed countries, have adopted both short-term, country-specific budget rules, and long-term EU-wide budget rules.

In general, the OECD concluded after observing fiscal consolidation efforts among OECD countries since 1990 that the more successful of these efforts combined rules to balance the budget with requirements to reduce expenditures. The study argues that no one rule fits all countries and all circumstances, but that successful programs of consolidation seem to have some common features. These features include rules that are simple to manage, while incorporating enough flexibility, or discretion, to respond to downturns in the business cycles. The OECD study also observed that budget rules that rely on reducing expenditures generally have been more successful. By focusing on expenditures, the rules were more successful because: 1) they were not reliant on cyclically volatile revenues; 2) they were designed to let economic stabilizers work during a downturn; and 3) they saved windfall gains during an upturn. The data in Table 6. also indicate if the budget rules include provisions for dealing with windfall surpluses and a "Golden Rule" provision. A golden rule provision requires that the central government's current expenditures match its current revenues, exclusive of capital investments.

              Table 6. Fiscal Rules Applied in Developed Countries

In contrast to the short-term, country-specific budget rules most OECD countries have adopted at various times to address rising central government budget deficits, the members of the EU also operate within the requirements of the Stability and Growth Pact, which was adopted in 1997. EU members decided that, due to the disparate performance and composition of their economies, it was necessary to adopt a fiscal rule in lieu of relying on market forces to coordinate their economic policies. The Pact consists of preventive measures that include monitoring the fiscal policies of the members by the European Commission and the European Council so that fiscal discipline is maintained and enforced in the Economic and Monetary Union (EMU). The Pact also includes corrective measures that provide for fines for countries that fail over a number of years to meet the Pact's requirements. The European Union comprises the largest single bloc of countries that collectively have applied a long-term set of rules. These rules require the members to apply corrective measures to reduce their annual budget deficits and to reduce the overall level of their government debt if the annual deficits or the overall amount of debt exceed certain prescribed percentages of GDP. Since the Stability and Growth Pact was adopted, however, it has not always been applied consistently, which eventually led the EU to amend the Pact.

The basic elements of the Stability and Growth Pact did not originate with the Pact itself, but were part of the original Maastricht Treaty that served as the founding document for the present-day EU. The budget rules are based on Articles 99 and 104 of the Treaty, and related decisions, including the excessive deficit procedure protocol. Article 99 of the Treaty requires the members to "regard their economic policies as a matter of common concern." They also are required to coordinate their economic policies in order to have "similar economic performance." Article 104 requires EU members to "avoid excessive government deficits." EU members are expected to follow established guidelines regarding the ratio of the government deficit relative to GDP and the ratio of government debt to gross domestic product. The Protocol on Excessive Deficit Procedure established the specific guidelines that are applied under Article 104. Under this protocol, EU members are expected to have an annual budget deficit no greater than 3% of GDP at market prices and government debt no more than an amount equivalent to 60% of GDP. The number of member states with a fiscal deficit above 3% of GDP increased from two in 2007 to twenty in 2010.¹³

All of the members of the EU are expected to meet the requirement of the budget rules. Nevertheless, the rules are of especial importance to the group of countries known as the euro area, because the members have adopted the euro as their common currency. Typically, countries have a set of economic policy tools available to them to manage their economies. These macroeconomic policy tools generally include such monetary and fiscal policy measures as control over the nation's money supply, adjustments in tax rates, and control over government spending. In addition, nations have tools to affect the international exchange value of their currency. By adopting a common currency, however, the euro area countries ceded control of their currency to the European Central Bank. Consequently, the euro area countries agreed that the loss of the exchange rate tool meant that they would need to make greater efforts to control their government spending and their government budgets in order to restrain inflationary pressures and to promote similar economic performance among countries that have widely disparate economies. As a result, the euro area countries adopted budget rules as a component of their common policy approach.

As the Pact took effect in 1999, EU members began criticizing the rules-based approach of the Pact for being too stringent and they questioned whether the rules could be enforced. In 2003, the weaknesses of the Pact were exposed when the European Council voted not to apply the punitive procedures under the Excessive Deficit Procedure to France and Germany, which had experienced rising levels of government debt. Some EU members argued that the Pact focused too heavily on the rules-based percentage guidelines associated with the Pact without regard for the circumstances under which a government's level of debt or its deficit spending may rise, for instance as a result of a temporary increase in government spending to counter an economic downturn.¹⁴

The EU experience with the Pact demonstrates the policy tradeoffs that generally are involved in adopting such programs. In order to have a fiscal consolidation program be effective, the program needs to have stringent rules and penalties for violating the rules. At the same time, the current economic recession and financial crisis have demonstrated that policymakers need some flexibility and discretion in implementing budget rules in order to adjust the policy mix and generally to respond to differences in economic conditions. A fiscal deficit during periods of economic recession or very slow growth, for instance, likely would require a different policy prescription than one that arises during periods of strong economic growth when revues would be high and payments made through automatic stabilizers would be low.

In 2005, the EU members adopted a number of changes to the Stability and Growth Pact. These changes shifted the enforcement of the Pact from a rules-based regime to one based more on a set of principles with more latitude for discretion in enforcing the corrective requirements. In the area of prevention, the modified Pact provides for each EU member to develop its own medium-term objectives to bring its deficit spending and its debt level into compliance based on the unique economic conditions of each member. The modified Pact also relaxes the annual deficit targets as Members move their budget balances into compliance and the Pact factors in the effects of cyclical economic activity.

The corrective measures also were modified in a number of important ways. The changes allow Members to avoid the corrective measures if their annual fiscal deficit is above 3% of GDP if they can demonstrate that the deficit is caused by "exceptional and temporary" circumstances. In addition, members can argue that their budget deficit should be exempt from the penalties of the Excessive Deficit Procedure if they can demonstrate that the deficit is the result of "other relevant factors." Among the other relevant factors that are listed as fiscal expenditures are: 1) officially sponsored research and development; 2) European policy goals; 3) support for international objectives; 4) capital expenditure programs; 5) pension reform; 6) fiscal consolidation programs; and 7) high contributions to EU-wide initiatives.

In 2008 as the financial crisis was unfolding, EU members were asked to provide a fiscal stimulus to their economies in ways that would comply with the Stability and Growth Pact. These efforts were part of a $256 billion Economic Recovery Plan¹⁵ proposed by the European Commission to fund cross-border projects, including investments in clean energy and upgraded telecommunications infrastructure. In order to comply with the Stability and Growth Pact, the EU asked its members to make their fiscal stimulus plans timely, temporary, and targeted, so they would not have a permanent impact on tax rates or on spending commitments beyond that necessary to counter the effects of the two crises. As a result, each EU member was asked to contribute an amount equivalent to 1.5% of their GDP to boost consumer demand. In addition, members were tasked to invest in such capital projects as energy efficient equipment in order to create jobs and to save energy, invest in environmentally clean technologies to convert such sectors as construction and automobiles to low-carbon sectors, and to invest in infrastructure and communications. This plan also proposed official support measures to increase the rate of employment and to focus investments on such high technology sectors as telecommunications and environmentally safe technologies.

While many in Europe and elsewhere felt the fiscal expansion during the depth of the economic recession was an appropriate response, the sovereign debt crises in Greece and Ireland emphasized shortcomings of the Stability and Growth Pact. As a consequence, some members of the European Commission have proposed changing the Pact to strengthen its provisions and to broaden the scope to include non-fiscal economic imbalances that have been outside the scope of surveillance under the Pact. The proposals would promote medium term budget targets to signal budget imbalances at an earlier stage and numerical benchmarks would be adopted to gauge the pace of debt reduction. The reinforced Pact also would monitor certain macroeconomic indicators to flag imbalances that could undermine the European Economic and Monetary Union (EMU). The proposal also calls for incentives and sanctions to enforce the economic surveillance that would be applied either automatically or semi-automatically on a sliding scale depending on the extent to which the corrective measures were adopted by EU members that were found to be not in compliance with the Pact.

Conclusions

Financial markets and policymakers are growing increasingly concerned over the high level of deficit spending and the growing amount of government debt among a large number of advanced and developing economies. Unlike previous bouts with rising government deficits in developing countries, most of the current increase in government spending does not reflect out of control spending, but represents a calculated response to a severe economic downturn and a global financial crisis. In general, the two crises have affected the balance sheets of the central governments in three broad areas: 1) special fiscal measures to address the financial crisis; 2) discretionary fiscal stimulus measures to spur economic growth; and 3) a surge in nondiscretionary spending and a loss of tax revenue. As a result of these factors, the financial crisis has undermined the effectiveness of budget rules as government budgets are affected by large or prolonged internal or external shocks. Most estimates indicate that such deficits will stabilize in 2010, but will not decline appreciably for some time after that. On balance, losses in tax revenue and an increase in spending associated with fiscal stimulus measures to counter the economic recession and the financial crisis are expected to have a relatively equal negative impact on the budget balances of the developed countries.

One approach most developed countries have used to address government budget deficits has been to adopt a budget rule. In general, most developed countries have at some time adopted budget rules to restrict the amount of deficit spending to a specified percent of GDP and to constrain the overall level of the central government's debt. One common feature of these rules, however, is that most of them were applied for a relatively short period of time. In contrast, members of the EU have adopted both short-term, country-specific budget rules, and long-term EU-wide budget rules. Academic studies seem to indicate that the more successful budget efforts combined rules to balance the budget with requirements to reduce expenditures. In developing such budget rules, policymakers are caught between designing rules that are enforceable, but inflexible, versus rules that are flexible and responsive to discretion, but less enforceable.

For national policymakers, the rising budget deficits and nascent economic recovery present a challenging policy mix. Various governments have budget rules in place to limit the budget deficits, but the necessity of continuing to provide stimulus to their economies to keep the recovery on track has put these budget rules on hold. For policymakers, the challenge is to unwind the fiscal stimulus measures that were adopted to prop up the financial sector and boost economic growth without short-circuiting the economic recovery. The strength of the economic recovery will determine the extent to which these dual policy goals are in conflict. A faster pace recovery will reduce the size of the government's budget deficits, which should work to ease the concerns of financial markets. Over the short-term, however, financial markets have displayed increased weariness over the magnitude and the pervasive nature of the deficits, especially in Europe. This could result in tighter credit and higher interest rates for all market participants.

Investors are particularly concerned over the exploding government debts and public unrest in Spain, Greece, Portugal, and Ireland. So far, the wealthier economies of Europe, particularly France and Germany, have felt compelled to step in and provide financial assistance to the four struggling economies as a necessary price for preserving the Eurozone. If the situation is prolonged, it may well challenge the willingness of populations in Germany and France to continue supporting financial transfers to other members of the Eurozone and possibly challenge the goal of European economic integration.

Author Contact Information

² Members of the G-20 are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union.

³The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis, International Monetary Fund, March 6, 2009.

⁴BIS Quarterly Review, The Bank for International Settlements, March 2010, p.1.

⁵ Faiola, Anthony, Debt Concerns Weigh on Europe, The Washington Post, February 6, 2010, p. A1.

⁶ The sixteen members of the Eurozone are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

⁷ Pan, Phillip P., Economic Crisis Fuels Unrest in E. Europe, The Washington Post, January 26, 2009, p, A1.

⁸ The current balance of payments facility was created under Article 143 of the Lisbon Treaty, which limits assistance to "member states with a derogation," i.e., to those outside the Eurozone.

⁹ Kumar, Manmohan S., Daniel Leigh, and Alexander Plekhanov, Fiscal Adjustments: Determinants and Macroeconomic Consequences, International Monetary Fund, IMF Working Paper WP/07/178, July 1007, p. 22.

¹⁰ Guichard, Stephanie, Mike Kennedy, Echkard Wursel, and Christophe Andre, What Promotes Fiscal Consolidation: OECD Country Experiences, the Organization for Economic Cooperation and Development, Working Paper No. 553, May 28, 2007, p. 7.

¹¹ Ibid., p. 10.

¹² Guichard, Stephanie, Mike Kennedy, Echkard Wursel, and Christophe Andre, What Promotes Fiscal Consolidation: OECD Country Experiences, Organization for Economic Cooperation and Development, May 28, 2007.

¹³ Public Finances in the EMU 2009, p. 30.

¹⁴ Beetsma, Roel M.W.J., and Xavier Debrun, Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility, IMF Working Paper WP/05/59, International Monetary Fund, March 2005.

¹⁵A European Economic Recovery Plan: Communication From the Commission to the European Council, Commission of the European Communities, COM(2008) 800 final, November 26, 2008. The full report is available at: http://ec.europa.eu/commission_barroso/president/pdf/Comm_20081126.pdf