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A Eurozone budget to partly decrease a burden borne by the member states
Lubor Lacina
Professor of Economics, Mendel University in Brno (Czech Republic), Think tank Mendel European Centre
Common monetary policy of the EMU does not fit specific needs of all member countries (no “one size fits all policy”). EU budget is too small to provide a stabilization function and not flexible enough. Therefore, the only tool left to fight asymmetric shocks is national fiscal policies. Economic shock leads to increased deficits of national budget that could further endanger the country in terms of higher interest rate on debt service. Austerity policies then intensify crisis and lead to even bigger debt problems of national public finances.
Aim of the proposed Eurozone budget is to partly decrease a burden borne by the member states when encountering a negative asymmetric shock and provide temporary transfers to help country decrease impact of the shock on national budgets.
The budget of the EU is clearly insufficient and unable to deal with asymmetric shocks
Currently, the budget of the EU is clearly insufficient and unable to deal with asymmetric shocks mainly due to its small size, rigid planning and completely different focus. As a response to the recent economic crisis, ad-hoc stabilization mechanisms out of the scope of the EU treaties have been developed and financial aid from such mechanisms has been triggered for the member states in need.
It is needed to re-think and redesign fiscal stabilization mechanisms in the Eurozone. Individual member states fail to run successful stabilization policies themselves. Fiscal stabilization tools have to be organized at supranational level in monetary union.
Eurozone crisis revealed inability of EU (Eurozone) to fight asymmetric economic shocks. The budget of the European Union is not big enough (robust) to perform stabilization function (just 1% of EU GNI). Eurozone budget has not been established yet.
One of the potential mechanisms is Eurozone unemployment scheme
Problem is intensified by division of EU to group of countries using Euro and those staying outside Eurozone. Under time pressure and desperate circumstances, Eurozone established stabilization mechanism (EMS) – outside the EU budgetary framework and the EU Treaties.
One of the potential mechanisms is Eurozone unemployment scheme that would form a milestone of the future Eurozone budget.
It is necessary to ensure that proposed system will not establish any permanent transfers from net contributors to net gainers of the proposed scheme. Therefore, net balances of individual member states should be monitored and precautions against permanent transfers established.
AGAINST
A Eurozone budget is unjustified and misdirected
The Eurozone budget is a favorite project of Commission, European Parliament and Emmanuel Macron. They hope that transfer payments within the Eurozone would smooth macroeconomic developments and help the peripheral Member States out of their enduring crises.
I oppose this idea for several reasons. First, such a budget is not compatible with the principle of responsible fiscal policy as agreed in the Maastricht Treaty and reinforced in the Fiscal Compact. According to these treaties, Member States should run balanced budgets or budget surplusses in normal times and rely on deficit spending only in bad times. With a Eurozone budget, however, Member States would be tempted to run budget deficits even in normal times because the Eurozone budget would still allow expansionary counter-cyclical policies when economic conditions deteriorate. Hence, the Eurozone budget is likely to increase public debt levels.
Member States would be tempted to run budget deficits even in normal times
Second, a Eurozone budget would entail permanent transfers. These would essentially circumvent the no-bail-out principle. In the Euro crisis, debt relief measures, one-off transfers and huge rescue mechanisms for indebted Member States have already considerably damaged this principle. A Eurozone budget would perpetuate this, since it would be needed only for countries which are unable to finance their policies on own account.
Third, the problem of the crisis countries is not a lack of demand or insufficient government spending. Rather, it is a supply side problem of low productivity (relative to wages) and, hence, insufficient competitiveness. Rigid labour markets, weak entrepreneurial activity, lack of innovative clusters, outdated education systems, corruption and poor public administration limit potential growth. Demand stimuli by a Eurozone budget would tend to preserve such structures by relieving pressure. Such a budget would create a subsidy-dependent mezzogiorno-economy rather than incentivising reforms and structural change.
Such a budget would create a subsidy-dependent mezzogiorno-economy
Fourth, there is simply no legal base in the European Treaties for a budgetary instrument which would benefit only a subset of all Member States. Cohesion policy, as defined in Article 174 TFEU, must be directed at the “overall harmonious development” of the Union. It cannot be applied to only the Eurozone countries which typically are the richer EU Member States.
Strengthening responsibility, accountability and ownership of economic policies is the only reasonable way forward in the Eurozone. This relies on the strict enforcement of the no-bail-out rule of Article 125 TFEU, accompanied by the guidance of the Maastricht and Fiscal Compact rules.
