• The latest issue of the IEB Report, “An Analysis of Fiscal Federalism in the EU”, examines the mechanisms available to the EU to manage the asymmetric shocks that affect its Member States.
• The Report argues that the current monetary union is not only insufficient to tackle instability, but that it also limits the States’ room for manoeuvre as they seek to curb the impact of the crisis.
The Institut d’Economia de Barcelona has published a new issue of the IEB Report, entitled “An Analysis of Fiscal Federalism in the EU”, and dedicated to analysing the European Economic and Monetary Union. The four experts that contribute to the Report coincide in stressing that the crisis has highlighted the inability of the EU to halt the decline of the economies of nations in distress and to avoid the growing asymmetry between the Member States. At the same time, the States find themselves unable to devalue their own currencies and so curb the impact of recession. The authors believe that the future of Europe requires a move towards a budgetary and fiscal union, which would strengthen the EU’s mechanisms and so help it avoid situations like those that have had such an impact on Greece, Portugal, Ireland and Spain in recent years
In his article “The Uncertain Path towards European Fiscal Union”, IEB Professor, Antoni Castells, questions whether a monetary union is possible without a fiscal union, and concludes that the former is not readily achieved without the latter – “In existing monetary unions, the central government budget plays an essential role in the correction of any imbalances”, and does so with three primary objectives: to stabilize the union during periods of asymmetric shock, to share the risks via a common treasury and to make fiscal transfers from the most competitive to the least competitive regions. Castells believes that in the EU “the current political conditions are far from ideal for taking decisive steps towards a fiscal union”.
However, Castells does acknowledge that the crisis has accelerated the transfer of sovereignty to the European Union via such agreements as the European Stability Mechanism, the European Investment Plan, the Treaty on Stability and the steps taken towards a Banking Union. However, he believes the Union is still a long way from achieving its goal: “… the crisis has highlighted the consequences of an incomplete monetary union (i.e., one without a fiscal union), and we are now making the mistake of building an incomplete fiscal union, centred exclusively on the fiscal discipline of the Member States while forgetting to build common fiscal institutions”.
The need for a budgetary union
Remy Prud’homme, Professor at the Université Paris-Est, warns in his article, “The European Union Budget: necessary and impossible” of the EU’s “instability”, attributable to the tiny budget it is given to manage. He argues that the Union is fairly well advanced in economic, regulatory and monetary matters, but that it is almost non-existent in budgetary matters, its budget representing just 1% of the GDP of the Member States. The author recalls that the Reichenbach Commission, on which he sat between 1991 and 1994, considered that to achieve macroeconomic stability, with efficient public services and a capacity for redistribution between people and territories, would require a European budget of at least 15% of the Member States’ GDP.
Prud’homme proposes four possible solutions to the situation. The first, that of retreat, would involve taking a step backwards and bringing the economic, regulatory and monetary integration into line with the Union’s modest budgetary integration: “Such a development would certainly upset the politicians more than the European nations, who have been giving signs of becoming increasingly tired of Europe”.
A second solution, forging ahead, would involve increasing the EU budget so that over a twenty-year period it might reach 15 or 20% of GDP. The author considers this option “unlikely” due to the “impossibility of increasing European taxes” in exchange for centralizing the powers currently in the hands of the Member States. Prud’homme sees greater hope in his third solution, that of bricolage, which would involve the promotion of a host of negotiated agreements, mechanisms and checks to reduce inequalities in times of crisis, in line with that taken by the Stability and Growth Pact.
Finally, the author proposes a two-speed Europe with the six signatories to the Treaty of Rome operating a common budget and associated policies, on the one hand and, the rest of the countries, forming a much less integrated group, on the other.
Political needs and the political reality
Martine Guerguil, from the International Monetary Fund, presents a similar vision to that of Antoni Castells in her article “Can the Eurozone Prosper without a Fiscal Union?”. She reminds us that most economists, from the moment steps were first taken to establish a common currency, warned that a monetary union without fiscal agreements would be associated with persistent macroeconomic instability. She believes that to correct current limitations a central budget needs to be created, “financed by common taxes and joint debt issuance”.
Guerguil highlights the successes of recent years, including the steps taken towards the Banking Union: “the most significant step towards economic integration since the adoption of the euro.” However, she also recognises the problems in its operation, namely the need to create a common tax protection system and the sharing of fiscal liabilities. The reality is that the Single Resolution Mechanism gives notable funding responsibilities to national authorities. In short: “The Banking Union reflects, once more, the gap between the perceived need for common instruments and the political will to implement them”.
The IMF representative warns of the dangers faced by the monetary union if no progress is made towards integration: “The eurozone may be diluted into a less ambitious currency union, prone to recurrent local crises and abrupt adjustment processes”.
Fewer rules, more institutions
Similar ideas are expressed by the European Union’s Delegate to the United States, Antonio de Lecea, in his article “The EU Fiscal Union”, which echoes the demands of representatives of the European Central Bank, including Mario Draghi and Benoît Coeuré, to move away from a rules-based system and to give careful consideration to an institutional system.
According to the author, the creation of a Ministry of Finance for the eurozone would centralize powers to prevent and correct economic and fiscal imbalance and to manage crises. De Lecea reminds us that various economists have supported this “centralized approach” proposing legal challenges at the national level and giving the Union the power of veto to force the transfer of sovereignty.