Written by Andrej Stuchlik, with Philipp Wegner
On 20 October 2016, the European Parliamentary Research Service (EPRS) jointly hosted a roundtable debate with the International Monetary Fund (IMF) to discuss current challenges for the euro area and potential options for a fiscal capacity.
Unfolding 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. While euro-area countries have a single monetary policy, their fiscal policies remain a national competence, although coordination and surveillance have been increased at the EU level. In 2015, the Five Presidents’ report revived the debate on how to complete EMU and make it more resilient to economic shocks.
Anthony Teasdale, Director-General of EPRS, moderated the ‘Euro Area at a crossroads: Economic governance and options for a fiscal capacity’ event, held in the European Parliament Library on 20 October in Brussels. The panel included: Reimer Böge (EPP, Germany) and Pervenche Berès (S&D, France), Members of the European Parliament and currently co-rapporteurs on the ‘Budgetary capacity for the Eurozone’ report; Jeffrey Franks, the Director of the International Monetary Fund (IMF) Europe Office; Cinzia Alcidi, Head of the Economic Policy Unit of the Centre for European Policy Studies (CEPS); as well as EPRS policy analysts Alessandro D’Alfonso and Andrej Stuchlik, authors of an in-depth analysis on reform options to counter asymmetric shocks.
The event began with a presentation by Jeffrey Franks. The IMF expects growth to remain comparatively low in the euro area with only around 1.5% real GDP growth in 2017 and significant differences across the EMU (Spain: +2.2%; Italy +0.9%). Having just returned to the pre-crisis level of GDP, the euro area is outpaced by the USA, Japan and the UK, which reached their pre-crisis level by 2013 at the latest. However, the euro area has been afflicted by a double dip recession, resulting in comparatively low inflation rates and high unemployment. Investment in the euro area is still 10% below its pre-crisis level. Additionally, the euro area is lagging behind in productivity and competiveness. The IMF proposes a mix of measures to deal with the problems, including: more incentives for growth-friendly structural reforms; completion of the banking union; the continuation of accommodating monetary policy; and the expansion of centralised fiscal support.
Jeffrey Franks then presented three options for a centralised fiscal capacity, saying that the IMF would see the establishment of such a capacity as a positive development, but is not recommending one option over the others. The first option is a tax-transfer scheme with a transfer of resources from the Member States to a central fiscal capacity that in times of crisis would reallocate them either to citizens through an unemployment insurance scheme, or to Member States through a ‘rainy day’ fund. Such an option would have the advantage of being rather automatic and counter-cyclical, but might have a limited capacity to address wide shocks hitting the entire area. A second option is a borrowing-lending scheme, where a central fiscal capacity would borrow funds on the bond market and lend it out to private projects, Member States or even the Union’s budget. This idea would create new fiscal space but, without conditionality, might also have the potential to undermine fiscal discipline. The third option is the creation of a (small) euro-area budget which could be financed either by direct transfers from Member States or by own resources (including potential debt issuance). Used for common public goods or targeted support, the budget would have the advantage of increased resilience to both country-specific and area-wide shocks. However, it may encounter political resistance and could crowd out national borrowing.
At present, the draft report by the European Parliament’s Committee on Budgets and Committee on Economic and Monetary Affairs (rapporteurs: Reimer Böge (EPP, Germany) and Pervenche Berès (S&D, France), calls for the creation of a fiscal capacity on top of existing EU funding instruments within its legal framework. The MEPs generally agreed with the conclusions drawn by the IMF. Reimer Böge stressed the importance of a swift conclusion, regardless of whether some differences remain across the political spectrum: ‘People have no interest in technical debates. That is our exercise’. The Brexit negotiations open a window for setting-up a fiscal capacity during the current mandate, and this has to be used. Pervenche Berès agreed that it was urgent to act, saying that, while the European Central Bank has done all in its powers to counter the crisis, the response of governments and finance ministers in terms of fiscal policy tools was lagging behind. For this reason, she considers it important for the European Parliament to help drive the debate.
Cinzia Alcidi reminded the audience of the variety and complexity of economic choices which have to be taken ex-ante when setting up a fiscal capacity: Which benchmark should eventually become stabilised (e.g. GDP output, employment rates, etc.)? Should people, companies or Member States be the recipient of payments? Would the respective stabilisation mechanism be triggered automatically or operate with some level of political discretion? How could it be financed and how would it interact with national instruments, for instance, with domestic unemployment schemes? Those questions need specific answers before a fiscal capacity can be set up. Some of them were examined in a recent EPRS In-Depth Analysis.