Should the Eurozone have a separate budget?

money euro eurozone budget european parliament lubor lacina bernd lucke debate
Numéro 1

Learn the ropes

What is the Eurozone?
The Eurozone, officially called the Euro area, is a zone composed by states which decided to replace their national currencies with Euro, designed as the single European currency. The Euro area was established by the Treaty of Maastricht in 1992, and it was first introduced to the market in 1999.

Today, the Eurozone is composed of 19 Member States. Besides Denmark and the United Kingdom, which obtained extraordinary derogations, all of the EU Member States should join the Eurozone when they fulfill the necessary criteria.

Source: The European Commission

Why a budget for the Eurozone?
Currently, the Eurozone Member States are implementing national budgetary policies in respect of the rules defined at the European level. A control of there policies is provided by a program called the European Semester.

Some economists argue that the construction of the Eurozone is not finished yet, and that it needs a budgetary stabilisation tool. This tool, a Eurozone’s budget, would be supplied by contributions of it’s members. According to the proposal of the European Commission, this budget would serve to help Member States facing a crisis and help in implementing the necessary reforms.

It would aim to complete the European Stability Mechanism, which can lend money to the Eurozone members, with none or very low interest rates in times of crisis.

Source : Toute l’Europe

Why do we talk about it today?
In May 2018, the European Commission officially expressed the will to create an Eurozone’s budget. This idea was supported by French and German heads of states, Angela Merkel and Emmanuel Macron. Currently, negotiations continue among finance ministers of the EU Member States. If they agree on creating such a budget, it might enter into force with the vote on the new EU budget in 2021.
Numéro 2

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The idea behind the Rift is simple: for each topic of debate, we provide you with an expertise based on a pro-con approach, written by competent and legitimate experts. We want to help you make your own opinion, and guide you on first steps to civic engagement.
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FOR

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

http://mec.mendelu.cz



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

Bernd Lucke

German MEP, Liberal-Konservative Reformer (LKR), European Parliament

bernd-lucke.de



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.

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