In the past year, there have been many calls for a permanent central fiscal capacity at the EU or euro area level. This column argues that a European central fiscal capacity would improve policy efficiency by focusing on stabilisation in the event of demand shocks and on boosting potential output in the event of supply shocks.
Editors' note: This column is a lead commentary in the VoxEU debate on euro area reform.
NextGenerationEU (NGEU) is the centralised fiscal initiative agreed by the EU in 2020 to ‘build back better’
after the pandemic; and the ‘Fit-for-55’ indicates the road that the EU
should follow to reach the sustainable economic and social development
that is one of the main aims of a central fiscal capacity. The EU’s
long-term economic potential would be improved if the member states were
able to effectively meet the NGEU and Fit-for-55 requirements, also
through the most recent REPowerEU recommendations.
In the past year, several academic papers have called for the setting
up of a permanent central fiscal capacity at the EU or euro area level
(e.g. Beetsma et al. 2021, Maduro et al. 2021, Romanelli et al. 2022).
During the public consultation on the review of the EU economic
governance by the Commission, the ECB, IMF and OECD made similar
proposals. In a previous paper (Buti and Messori 2021), we outlined
that – in principle – a central fiscal capacity could focus on three
functions: cyclical stabilisation, support for the implementation of
national structural reforms and investment, and the supply of European
public goods (EPGs). Table 1 sketches out the main goals, the
operational targets, and the key features of these three options.
Table 1 Central fiscal capacity: Three options
Source: authors’ elaborations
Creating a central stabilisation capacity would be the most rational
choice for the completion of the euro area’s economic governance
framework. It would complement the response of the ECB and of national
fiscal policies to symmetric and country-specific demand shocks. The
most cumbersome political issue is moral hazard: if the national
governments anticipated the support by a central fiscal instrument in
case of negative shocks, they would have less incentive to create
national fiscal room for manoeuvre in periods of strong growth. This
would lead to a ratcheting up of public debt and would increase the risk
of that form of fiscal dominance that characterised the euro area in
the period 2014–2018. The observed lack of fiscal adjustments during
‘good times’ strengthened this argument (e.g. European Commission,
2019). Hence, the political feasibility of the first option will remain
untested unless there is a significant improvement in cooperation (and
trust) between the EU’s member states.
The second option – that is, setting up conditional transfers to the
EU member states to support national reforms and investment – would
build on NGEU arrangements and be akin to de facto reviving the proposal
of ‘contractual arrangements’ made by Herman van Rompuy in mid-2013
when he was at the helm of the European Council. The proposal was
rejected by the majority of the EU’s member states at the end of that
same year: the Northern countries refused permanent transfers, whilst
the Southern countries resented an intrusive role of the European
authorities in their domestic policy choices. Under the pressure of the
pandemic shock, NGEU overcame those objections by its temporary nature.
A third option is to use the central fiscal capacity to step up the
supply of EPGs. Whilst NGEU represented a breakthrough and a fundamental
institutional innovation, its ‘European added value’ in its final
design was lower than in the initial proposal by the Commission. As we
pointed out in an earlier paper (Buti and Messori 2020, see also Pisani
Ferry 2020), in the agreement on NGEU reached at the European Council in
July 2020, the non-allocated part of its main programme (the Recovery
and Resilience Facility, or RRF) was substantially reduced in favour of
transfers to member states. Conversely, the supply of ‘pure’ European
public goods (as dubbed by Buti and Papaconstantinou 2022) – such as a
European security system, the joint public procurement of vaccines,
investment in hydrogen energy, the construction of a European
telecommunication network, or the joint production of semiconductors –
cannot be satisfied by the simple aggregation of national public goods...
more at CEPR/Vox
© CEPR - Centre for Economic Policy Research
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article