The euro area needs rules that work

More credible fiscal rules in conjunction with automatic sanction mechanisms – this is the rule of thumb with which the German Council of Economic experts and its French counterpart wish to improve the Monetary Union’s viability for the future. An important proposal from the German and French economists is the creation of simpler European fiscal rules: according to these rules, in the long term the nominal growth of government spending should not exceed the nominal growth of the economy. The goal is to achieve more transparent and less pro-cyclical fiscal policy in the member states. Indeed, a glance at the development of debt and of the budget situation in many euro area countries does cast doubt on the efficacy of present fiscal rules, which have been changed frequently in the past few years. But is the EU really short of rules or is it failing to implement existing rules successfully? Above all, the euro area needs improved mechanisms with which it can impose budget discipline on the euro area countries.

The economic experts of these two large euro area countries also wish to be able to impose sanctions against euro area member states by way of an automatic mechanism and seek to curtail the influence of the politicized EU Commission in these matters. Previously, however, the budget discipline of many euro area countries has been undermined by national decision-makers within the EU institutions seeking to pursue their sovereign interests – and loopholes in the rules have made it easy for them to do so. For example, the EU Commission and the European Council have never sanctioned any of the many “deficit sinners” within the framework of proceedings against an excessive deficit – after all the “judges” would probably have faced similar sanctions themselves sooner or later. For this reason, the economists propose strengthening national fiscal councils with the mandate of ensuring budget policy compliance. A better approach would no doubt be an independent control body at the supranational level, for example a European Monetary Fund. On the lines of the ECB this could be a “sharp sword” with which to control the fiscal policy of the euro area countries.

While there is general agreement among the political élites that the financial and debt crises of the past decade have laid bare several institutional weaknesses in the construction of the euro area, opinions differ as to the fundamental course the euro area should take in the future. The European heads of government have postponed urgent decisions until a summit meeting to be held in December. It is, however, open to question whether they will be able to bring themselves to carry out a spirited reform of the euro area just a few months before the European elections. Even the President of the EU Commission, Juncker, was surprisingly short of words on the future of the euro area in his state-of-the-union speech. The demonstrative collaboration between German and French economists should serve Merkel and Macron as a model. Without close co-operation between Berlin and Paris the European project will not progress over the next few months. But the following motto should apply: compromises for reforms are good, but they also need to help Europe make progress!

 

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