Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

16 December 2021

Vox: Reforming the EU macroeconomic policy system: Economic requirements and legal conditions


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....

more at Vox



© VoxEU.org


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment