This column summarises the findings of a group of economists and lawyers specialised in EU matters who undertook a comprehensive assessment of the economic requirements and legal conditions of a well-functioning macroeconomic policy system for the EU and the euro area.
The stability and adequacy of the European monetary and fiscal
frameworks are increasingly challenged by enduring changes in the
economic environment. This column summarises the findings of a group of
economists and lawyers specialised in EU matters who undertook a
comprehensive assessment of the economic requirements and legal
conditions of a well-functioning macroeconomic policy system for the EU
and the euro area. They propose reforms of economic framework in line
with economic necessities along three dimensions (coordination of fiscal
and monetary policies, fiscal rules, and fiscal capacity at EU level)
and assess their legal feasibility. They conclude that meaningful
reforms that would bring legal clarity and improve economic performance
are feasible within the confines of existing primary law.
The stability and adequacy of the monetary and fiscal frameworks of
the euro area are increasingly challenged by enduring changes in the
economic environment. While the initial legal architecture of the EMU
has largely remained unchanged and while experience has shown that there
is flexibility enshrined in the system, real-time pragmatic responses
have tested the limits of adaptation by interpretation of prevailing
legal provisions. Moreover, economic realities have evolved and pose new
challenges as regards the relationship of monetary and fiscal policies,
the adequacy of the fiscal legal framework and the need for concerted
EU responses to unforeseen event such as the current pandemic crisis.
Overall, the EMU policy system has been stretched and while effective,
responses to events have been distant from first-best strategies.
Against this background, a group of economists and lawyers
specialised in EU matters undertook a comprehensive assessment of the
economic requirements and legal conditions of a well-functioning
macroeconomic policy system for the EU and the euro area (Maduro et al.
2021).
Download CEPR Policy Insight No. 114, "Revisiting the EU framework: Economic necessities and legal options", here
We propose a reform of the legal and economic framework which
would bring legal boundaries in line with economic necessities along
three dimensions. First, fiscal and monetary interactions should allow
for a venue for non-binding fiscal-monetary coordination, for an
interpretation of the rules giving more leeway to the ECB’s pursuit of
price stability, and for a strengthening of fiscal support to monetary
objectives. Second, with uniform and rigid fiscal rules becoming
increasingly inadequate in a fiscally heterogenous EMU, we argue for a
reform of the fiscal rules that gives higher priority to debt
sustainability, creates room for stabilisation, and allows for
differentiated medium-term debt anchors and risk-based debt reduction
objectives. Third, we suggest building on the NGEU experience to develop
new vertical coordination mechanisms between the Union and the member
states and to create a standing contingent fiscal capacity at EU level.
These reforms can be implemented without amending the EU Treaties,
whose basic provisions remain sound. They would provide better clarity
and legal certainty and help equip Europe for rough times ahead.
Stretching and misinterpreting the rules: Economically sub-optimal, legally controversial
The EU is not a federal state. Its ability to reform itself to
respond to transformative challenges, even threats to its integrity is
bound by both legal and political constraints. Since the Maastricht
Treaty entered into force three decades ago, pressing policy challenges
were dealt within the framework of largely unchanged EU primary law. By
stretching existing legal provisions, it was possible for monetary and
fiscal policy to explore unchartered territories, to expand the scope of
fiscal rules, and even to assign to the Union’s public finances the new
role of supporting the rebound of Covid-hit economies with
debt-financed grants and loans. In other cases, remaining leeway under
the rules has not been exploited, for either unfounded legal concerns or
due to political complacency.
Some initiatives gave rise to legal challenges on the ground that
they infringe certain provisions of the EU Treaties, exceed the
competences granted to the EU, or are contrary to the constitution of a
member state. Furthermore, legal arguments take place against the
background of political disagreements among and within member states. As
a result, it has become conventional wisdom that the EU should find
ways to adapt without treaty revisions or significant legislative
adaptation.
Legal tensions and political complacency however contrast with an
evolving macroeconomic reality requiring policy changes on various
fronts. An overly strict disconnect between fiscal and monetary policy
inhibits the effective pursuit of price stability; fiscal sustainability
remains essential but fiscal rules have become outdated in a post-Covid
world with higher public debts, very low or even negative interest
rates, and the limited effectiveness of monetary policy at the effective
lower bound; and vulnerability to shocks requires a common budget to
offer stabilisation potential as highlighted by the pandemic crisis.
The assumption that Europe should respond to momentous
transformations in the economic context without even considering
adapting its basic legal framework is a recipe for dangerously
suboptimal policies. This may in turn lead to stretching the system more
and more, and consequently to making it increasingly vulnerable to
legal challenges and political contestation.
This is a dangerous vicious circle. Reflections on the future of
Europe should rather start by assessing what are the necessary policy
reforms and find out if they are feasible within the confine of
prevailing primary law....
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