To remain sustainable, the Eurozone must adopt a common fiscal policy

The Euro is a pioneering symbol of the European Union and one of its most innovative economic achievements. There is no doubt that greater economic integration has brought benefits to the EU and its citizens but whilst the euro area experiences a robust recovery, the framework supporting Europe’s Economic and Monetary Union (EMU) remains incomplete. It is unsurprising, then, that the region remains susceptible to the possibility of further financial crises. Worryingly, the emergence of economic crises in the Eurozone symbolises a turning point in the history of European integration, illustrating the contradictions of having created a single currency without a suitable economic government, as well as the unsustainability of the EMU as it was originally drafted in the Maastricht Treaty.

As difficult as it is for some economists, a common currency should be viewed positively. Indeed, without it, currencies would be free to compete against each other on the global markets and this would greatly inhibit trade. However, a common European currency in its current form is not enough. The Eurozone must begin to develop elements of a common fiscal policy, including greater levels of risk sharing, to preserve and protect further attempts at financial and economic integration. For, without some degree of union, the region will continue the idiosyncratic existential shocks that policy will no longer be able to ignore.

If Europe’s Economic and Monetary Union (EMU) were like any other large currency area, such as the United States, members would tackle financial shocks together with an empowered centralised mechanism – or jointly run institution – to resolve stressed financial entities and provide fiscal relief to member states. However, because the EMU is not a political union, member states are left exposed to economic or financial shocks, especially where public debt levels are high and governments have little manoeuvrability to respond with individualised fiscal policies. Similarly, private markets do not offer sufficient insurance against declines in consumption during an economic crisis. Government deficit spending is an alternative, but this comes with higher taxes or lower spending later and may not be an option when public debt is already very high.

It is not to say that there haven’t been attempts made to strengthen the EMU. Reassuringly, arguments in favour of establishing a common fiscal policy in the Eurozone have been advanced, in particular the ‘Report of the 5 Presidents’ (Jean-Claude Juncker, Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz) on “Completing Europe’s Economic and Monetary Union”, as well as the declarations in the Werner Report (1970) and MacDougall Report (1977) have suggested that the European Monetary Union would benefit from a centralised fiscal stabiliser in order to deal with asymmetric shocks. But, without action, these arguments resemble nothing more than an empty shell.

Adding true representation to taxes

A common issue that pervades any mention of fiscal integration is the role of nationhood. It must be acknowledged that the ability to collect taxes and spend public resources symbolises a fundamental act of self-determination of each political community and thus requires strong democratic participation and acceptance from the citizenry.

For European federalists, the idea of a national identity is a foreign concept, and through the lens of European history, it is not difficult to understand why. European taxpayers in more prosperous nations may begrudge how their income is being spent elsewhere. Whilst political values influence the strength of resentment, differing national loyalties exacerbate the strength of these grudges. Further tensions undoubtedly stem from the fact that currently, nations cannot vote on each other’s economic policies.

As long as the power to control fiscal policy remains at a national level, current Euro budgets amount to a system in which taxation is not met with accountability and representation. During the European Debt Crisis, for example, the imposition of austerity measures in struggling nations represented a system of shoddy, intergovernmental deals in which the sovereignty of the recipient nations was quashed. A system of collective decision making, based on democratic control would have undoubtedly averted the clumsy response to the crisis.

The adoption of the single currency is incompatible with the preservation of national economic sovereignty, which needs instead to be pooled through the creation of an overarching democratic and transparent policy. Due to the reliance on interdependence within a monetary union, Member States would, therefore, be responsible for their economic policies not only to their national citizens but to all citizens of the union. Essentially, as the Eurozone shares a currency, uniting fiscal policy is the most logical answer.

The Solution?

If, then, we are to address the current structural issues policymakers from across the continent must call for the creation of a common fiscal policy to accompany the current Economic and Monetary Union. Such a union must require a significant degree of economic convergence, further pooling of decision-making power on national budgets to ensure fiscal discipline at a domestic level and prevent moral hazards. Such an economic policy should comprise:

a. an autonomous EMU budget: this could be financed through combined resources, such as, but not limited to a common carbon tax, excise duties, or corporate and personal income tax revenue; the imposition of European taxes should contribute towards a decrease in the level of overall fiscal imposition on taxpayers;

b. adherence to the Macroeconomic Imbalances Procedure (MIP) as part of the Six-Pack; to broaden the scope for surveillance and coordination beyond fiscal policy variables by providing a new tool for surveillance and correcting imbalances.

c. a fiscal stabilisation function – as outlined in ‘The Five Presidents’ Report 2005’ (Juncker’ to encourage stronger economic policy coordination to deal with a severe crisis. Such a fiscal capacity will obey the following guidelines:
i. it should not result in permanent transfers between Member States.

ii. it should not undermine the incentives and measures for sound national fiscal policy-making.
iii. it should not be an instrument solely for crisis management.

d. the creation of a common fiscal ‘shock absorber’ to provide inter-regional fiscal risk sharing, which allows the levelling of consumption from asymmetric output shocks among Member States. The benefits from international risk-sharing are well-established in economics literature (Obstfeld, 1994). In that literature, a diversity of membership is also seen as an opportunity to risk diversification. In the case of monetary union, a ‘non-Optimal’ Currency Area can thrive because asynchronous business cycles generate opportunities to share portfolio risks through financially integrated markets.

e. greater financial integration through the creation of solidarity tools such as ‘Eurobonds’- to encourage the mutualisation of debt and redistribute the effective cost of borrowing; stronger policy coordination via direct budget surveillance and the helping of weaker Member States to resume growth and avoid the risks of further liquidity crises.

f. the formation of a European Fiscal Policy Committee to replace or update the existing European Fiscal Board, composed of independent accountable financial experts tasked with providing binding recommendations to the European Commission on the euro area’s aggregate fiscal stance. Such an entity will:

i. be headed by a democratically legitimate Eurozone Finance Minister vested with the power to veto national budgets and the ability to utilise the European Economic and Monetary Union budget in order to stimulate economic growth, sustainable development, and cohesion, forming the basis of ‘shared-sovereignty’ and better internalisation of the externalities of fiscal policies.
ii. possess the power to enforce sanctions on member state sovereigns who refuse to adopt required fiscal policy stances. This reflects the view of a ‘stability union’ proposed by Germany in which a supranational European agency will ensure coordination and stability being guided by a euro-area perspective rather than by national interest.

g. the Eurozone Finance Minister should also hold the office of Vice President of the Commission, in a manner similar to the High Representative for the Common Foreign and Security Policy; as such, their duties would comprise:

i. chairing Eurogroup meetings in a coordinated approach.
ii. regular appearances before the European Parliament to rationalise and justify the actions of both themselves and the European Fiscal Policy Committee.

h. the inclusion of the European Parliament itself in the decisions regarding the management of the Eurozone budget by introducing an advisory ad hoc Eurozone Parliamentary Committee as proposed by the European Parliament itself in its Resolution of December 12th 2013.

Policy makers, should also calll on the European Central Bank to consider utilising its legislative ability under Article 129 (3) TFEU in order to reform, by general legislative procedure, Article 33(1)(a) of the ECB Statute, with the view of transferring a port of its net profit into the aforementioned Eurozone budget or a new resource of the Union. This should be achieved in a manner ensuring that only Member States that have adopted the single currency benefit from this profit.

Furthermore, the European Parliament, European Commission and individual national governments should take action towards the creation of a common fiscal policy in the framework of the European Economic and Monetary Union through the furthering of current proposals stipulated in the Five Presidents’ Report and a reform of the European treaties.

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