The impact of preferences on early warning systems - The case of the European Commission's Scoreboard

- Thresholds in early warning systems depend on preferences of politicians.
- Preferences might be different for different politicians depending on institutions.
- Preferences are uncovered in this paper for the first time.
- Results show that the European Commission sets thresholds relatively low.
- Findings are in line with a hypothesis derived from institutional setting.

The European Commission's Scoreboard of Macroeconomic Imbalances is a rare case of a publicly released early warning system. It allows the preferences of the politicians involved to be analysed with regard to the two potential errors of an early warning system - missing a crisis and issuing a false alarm. These preferences might differ with the institutional setting. Such an analysis is done for the first time in this article for early warning systems in general by using a standard signals approach, including a preference-based optimisation approach, to set thresholds. It is shown that, in general, the thresholds of the Commission's Scoreboard are rather tight (resulting in more alarm signals), as compared to a neutral stand. Based on political economy considerations the result could have been expected.