31 March 2016

Policy Network: The future of the eurozone

Create a eurozone budget and automatic stabiliser

A common fiscal capacity in the form of a eurozone budget is one of the most prominent reform proposals. The argument is that in the absence of adjustment through national monetary policy, the flexibility provided by fiscal policy at the eurozone-level should be increased. A common budget could stimulate growth in those parts of the currency union that perform under eurozone average thus contributing to economic convergence. It could also be used as a flexible policy instrument to respond to sudden economic shocks caused, for example, by global economic crises. The key advantage of the eurozone budget is that it is flexible and discretionary.

The size of the budget will depend on its exact purpose, but current proposals range from four to seven per cent of eurozone GDP. It could be financed by member state contributions or a eurozone tax. The latter is preferable as it would even further contribute to balancing divergent economic developments in the bloc and it would form a direct connection between eurozone tax payers and eurozone institutions without intergovernmental bodies diffusing political responsibility.

Another frequently discussed proposal involves insurance-based mechanisms that function as automatic stabilisers. They would also add to the necessary flexibility in fiscal policy. The basic idea is that a eurozone insurance withdraws money from economies that are over-performing and transfers them to those whose economic development is below average. Unlike the eurozone budget, an insurance mechanism would be by definition automatic and not based on political discretion. [...]

Establish a euro finance minister

The common fiscal capacity, in particular the eurozone budget, will need a political institution that decides over which programmes and regions are supported and monitors the compliance with the fiscal rules of the eurozone. This could be achieved through a euro finance minister, something proposed recently by German finance minister Wolfgang Schäuble. The euro finance minister should have a strong role in coordinating national budgetary policies and enforcing common fiscal rules. It should also be the euro finance minister that carries the political responsibility for the effectiveness of European fiscal policy through the common budget. This means that she has to be elected and controlled, for example, by a joint chamber of members of the European parliament and national parliaments.

Towards a social union

[...] We need a reform agenda that increases the productivity of our social institutions. 

[..] The eurozone therefore has to adopt basic social rights that carry the same legal significance as fiscal rules. The adoption of European minimum standards on systems of minimum income is already feasible within the current treaties. There can also be a eurozone framework for national minimum wage policy. Generally, these should be European frameworks for national minimum standards that allow for the diversity of national welfare states.

How to get there

[...] The promises made to the British government in an effort to prevent the country from leaving the EU open a window for treaty change not only for the UK, but also for the eurozone. This is not unreasonable to assume considering the recent negotiations over the British referendum. The eurozone members secured the commitment from the UK that it will not impede reforms of the bloc in return for their support of the British demands. Moreover, in the ‘fiscal compact’, adopted in 2012 and one of the central treaties that govern the eurozone, a review is foreseen by 2017. After elections in France and Germany in the same year, there will be an important chance for reform.

To use this opportunity, we need more debate on the eurozone and the European Union. [...]

However, it should be equally clear that this approach cannot provide answers to eminently political questions of European integration in a time when functional interdependencies among policy areas and virulent Euroscepticism are both rapidly growing. Solutions will have to come from a broad political debate about the future of the union. No doubt, the politicisation of European politics carries many risks that the traditional elite-driven approach did not know. But it may very well be the most viable option for the future of Europe and the eurozone.

Full article on Policy Network

© Policy Network