A common budget for the euro area has been in the plans for a long time. The coronavirus crisis is contributing to its entry into force and increasing its size. In this way, the euro area will begin a permanent fiscal policy, even though it is not being admitted in Finland currently. This means an increase in latent debt liability, write Aki Kangasharju and Päivi Puonti.
The idea of a common fiscal policy for the euro area has been around for years. In 2015, the leaders of the major European institutions created an impressive vision of fiscal policy as a complement to the EMU. In 2017, the Commission presented its roadmap for deepening the EMU[1], and on that basis in 2018 legislative proposals were introduced for establishing a so-called European Investment Stabilisation Function and a Reform Support Programme.
The Investment Stabilisation Function was about the euro area’s own fiscal policy in order to stabilise the macro economy. The Reform Support Programme was intended to financially reward member states for implementing country-specific reform recommendations.
Finland opposed both proposals. We felt that there was no need to set up new macroeconomic arrangements for the euro area in order to adjust the economic cycle.[2] In turn , the financial promotion of structural reforms was considered to transfer the competences of structural policy from the member states to the Commission[3].
However, the major countries thought otherwise, so the Euro Summit decided to set up a euro budget in December 2018.[4] Later, the word ‘budget’ was faded from the name, calling it ‘an instrument for convergence and competitiveness in the euro area’. The instrument in question was part of the common fiscal policy for the euro area, and the package also included the Reform Support Programme opposed by Finland[5].
Now the project to establish a euro budget is basically frozen due to the coronavirus crisis.
“No proposal will ever die in the EU,” Jim Brunsden, a journalist for the Financial Times, said recently, writing about the planned Capital Markets Union in Europe.[6] The Commission is therefore proposing the establishment of a common fiscal policy once the “assessment of the economic policy framework” halted by the coronavirus crisis is finally completed[7]. It may be called the euro area budget, the fiscal capacity, the investment stabilisation function, the recoveryfacility , or something else, but it is all the same thing.
The coronavirus crisis brought the development of the euro budget to a standstill, but the development of the issue itself has only accelerated, and the budget total has increased as a result of the crisis. Elements of the planned euro budget were already included in the EU’s stimulus package. Both the planned budget and the recovery and resilience facility (RFF) are intended to provide grants for investment and re-structuring in line with the objectives set out in the European Semester.
Due to the coronavirus, grants from the stimulus package will not be available until the last year of the program in 2023. For the most part, it is a matter of supporting the already weaker regions with common funds.
If the euro area budget could be transformed into a coronavirus recovery instrument, then maybe it is also possible, that the recovery instrument will be converted into a permanent instrument of a common fiscal policy – without any public debate.
The Finnish government disputes this perspective. France, on the other hand, has been advocating this for a long time. According to the German Finance Minister, Olaf Scholz, the recovery instrument marks the beginning of the European Financial Union, although the government is still officially in favour of a one-off stimulus package.
The European Central Bank, for its part, speaks openly about the launch of a permanent fiscal policy. The effectiveness of monetary policy has decreased as a result of zero interest rates and cannot be tailored to varying needs on a country-by-country basis, in contrast to fiscal policy.
At the informal Ecofin held in Berlin on 11 September 2020, Daniel Gros, Director of the Centre for European Policy Studies (CEPS), a well-known Brussels think-tank, also suggested to Finance Ministers of the EU that the recovery fund is an important step towards deeper integration and the EU’s own fiscal capacity. [8]
One cannot emphasize enough the importance of public debate. The debate on deepening the integration should take place well in advance of the Commission’s legislative initiatives appear on the table.
We would have had a good opportunity to do so along the way, with the various working groups and parliamentary committees considering the proposals. However, the official Finland decided not to use the opportunity.
The core question is why it is precisely fiscal policy that is to be pursued, and yet in a manner whose economic effectiveness is easy to question. A better outcome would have been achieved by using the support instruments built in the euro crisis.
The progress of the Banking Union waits for the weakest banks to get out of problem loans and large domestic loans. On the other hand, the progress of the Financial Union will not be caught up by the fact that some countries are dangerously indebted.
Paradoxically dangerous debt levels are precisely the reason why some claim that fiscal policy needs to move forward. It would create room for recovery for indebted countries because they no longer have it themselves. Similarly, for us net contributors to the EU, developments mean growing contingent liabilities alongside visible public debt in order to keep the euro area intact.
[1] https://ec.europa.eu/commission/presscorner/detail/en/IP_17_5005
[2] SuVL 9/2018 vp – U 86/2018 vp.
[3] SuVL 8/2018 vp – U 85/2018 vp.
[4] Euro Summit statement, 14 December 2018
[5] Basic memorandum of the Ministry of Finance to Parliament VM2019-00602
[6] https://www.ft.com/content/3096a9fd-f7c0-497d-b374-700f1574fedf
[7] Commission’s “Economic Governance Review”, p. 20:
[8] Daniel Gros: Europe and the Covid-19 crisis, p. 12: the NGEU package … represents an important step towards European solidarity and a mobilisation of common fiscal resources. The RRF represents a fundamental advance in European integration https://www.ceps.eu/ceps-publications/europe-and-the-covid-19-crisis/
