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A fiscal capacity for the euro area? Options for reforms to counter asymmetric shocks

Written by Alessandro D’Alfonso and Andrej Stuchlik,

© Wolfgang Cibura / Fotolia

Beginning in 2010, the sovereign debt crisis exposed weaknesses in the economic and monetary union (EMU), the integration process that brought about the creation of the euro. Member States and EU institutions have taken a number of measures to tackle these shortcomings, including stricter rules on economic governance and setting up the European Stability Mechanism. Ideas to further strengthen EMU include the creation of a specific ‘fiscal capacity’ for the countries that have adopted the single currency. In the longer term, this could lead to the establishment of a dedicated euro-area budget.

In 2012, policy documents from EU institutions envisaged steps towards fiscal union, coupling budgetary discipline with solidarity tools. Two main functions are identified for an EMU fiscal capacity: 1) promoting structural reforms; 2) mitigating macro-economic shocks which affect only some euro area countries.

During 2013, the debate focused on the creation of a ‘convergence and competitiveness instrument’ (CCI) that would aim to promote structural reforms. A CCI would have encompassed both contractual arrangements, through which Member States commit themselves to key structural reforms, and financial incentives to facilitate the implementation of those reforms. Already in late 2013, after the immediate threat of failing financial markets had decreased, the political will to pursue work on CCIs faded, while the discussion on an all-encompassing EMU reform resumed after the European elections in May 2014.

While overall real GDP growth in the euro area remains sluggish (-0.3% in 2013, 0.9% in 2014 and 1.1% in 2015), divergence between Member States in the monetary union has grown recently. Against the backdrop of crises in Cyprus (2013) and Greece (2014, 2015), the European Council assumed a more important role discussing EMU reform, involving all major European institutions. Building upon earlier work in 2012, the Five Presidents’ Report of June 2015 spelled out specific steps and institutional elements on how to ‘complete’ the monetary union. Several policy options are currently under discussion, some including automatic stabilisation instruments (such as European unemployment insurance), and some containing more room for political discretion (such as a public investment strategy).

The European Parliament’s Committee on Budgets (BUDG) and Committee on Economic and Monetary Affairs (ECON) are jointly preparing a report on a budgetary capacity for the euro area. In May 2016, the two rapporteurs presented a draft report on a budgetary capacity for the euro area, combining three different pillars: an instrument to incentivise structural reforms, a pillar to counter asymmetric shocks in individual Member States, and a third pillar to mitigate the effects of symmetric shocks for the euro area as a whole.

Proper democratic scrutiny of EMU economic governance, with new measures in this area possibly having implications for the European Parliament, and the question of political feasibility, are also central components of this debate.

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