27 April 2018

Federal Trust: Eurozone Stabilisation Fund: Revisited

[...]This paper presents a sound working model for a Eurozone Stabilisation Fund that would achieve proactive reform, provide maximum economic benefit over time and builds on the existing institutional configurations of the Eurozone.

The EZSF would bolster the capacity of national administrations to deal with asymmetric economic shocks that can cause their growth to overheat or fall significantly below potential.  Consumption and output levels across Eurozone countries would be better stabilised, at or close to their potential rates.  When needed, timely additional resources could be provided through the EZSF to invest, stabilise consumption or facilitate reforms that ease the path back to stable economic growth.

This paper also details valid concerns regarding moral hazard, free riding and misuse of EZSF funds.  These concerns can be addressed and the risks substantially reduced through two institutional mechanisms.  Firstly, the overall size of the EZSF and maximum payment in any given year would be capped.  Secondly, expenditure from the EZSF would be monitored and sanctions applied for misuse of the fund.  Oversight would be convened through a partnership of the Commission, utilising its technical capabilities, and European Parliament, leveraging its representative and democratic role for the Eurozone taxpayers who would fund the EZSF.  A menu of sanctions is also envisaged for profligate national governments.

Limiting the remit of the EZSF to cross-regional stabilisation minimises the impact on Eurozone economic aggregates and the ECB’s policy decisions.  Expenditure within the EZSF model is concentrated to where it would have greatest impact, with payments triggered when growth falls significantly below potential.  Contributions to the fund and payments from it are proportionate to GDP.  Crucially, this model means that all Eurozone countries would be treated equally and all could receive support in proportion to their annual contributions.

National finance ministries would draw up an additional mini-budget to deliver the additional fiscal stimulus from the EZSF with minimal time lag.  This respects the principle of subsidiarity, allows member countries to retain significant autonomy and reflects their capacity to determine how the additional resources should align with their recovery strategy and national characteristics.  Their use of EZSF funding would subsequently be examined to determine the appropriateness, allowing for oversight and accountability which is in the interests of Eurozone taxpayers who would ultimately pay.

The EZSF has been presented here as a stand-alone configuration, however the design principles might also be incorporated as a Eurozone component of the EU budget.  Its size could also be scaled down or up depending on the political consensus reached by key decision-makers. Econometric analysis is needed to illustrate how the EZSF would have functioned, with the financial implications for member countries, had it been in place at the birth of the euro in 1999.  Notwithstanding this, the rationale and need for cross country stabilisation are clear and it is not hard to imagine how the EZSF could have helped avoid some of the imbalances in the lead up to 2008.

The economic outlook and political climate are now more favourable than have existed since the euro came into being.  Furthermore, there are substantial and growing political risks from inaction – maintaining the status quo is untenable.  In short, the Eurozone must address its shortcomings to enhance prosperity and sustain the euro.  Strong leadership will be required from France, Germany and others to persuade their partners to capitalise on this strong economy and drive Eurozone integration.  The Eurozone Stabilisation Fund is needed to achieve meaningful reform and support growth for years to come.

Full paper on The Federal Trust

© Federal Trust