Any major economic shock will affect the whole euro area so member states need to have a central fiscal capacity if they want to counter it effectively, European Fiscal Board (EFB) president Niels Thygesen told reporters on Tuesday (25 June).
The remarks come as the introduction of a stabilization mechanism in the so-called Budgetary Instrument for Competitiveness and Convergence – what is left of the Eurozone budget – was almost taken off the table, in spite of France effort to keep the idea alive.
“Whatever shock might come will hit the whole of the euro area, not just some countries. We regret that this special facility is not available, even if we don’t think it will come into use on this occasion,” EFB chairman underlined during a briefing in Brussels.
The member states have been “unable to agree on steps towards central fiscal capacity,” the authority pointed out, as the Eurogroup and then the heads of government failed to agree on a more ambitious budgetary instrument for the Eurozone.
“The basic problem of the Euro area is that we have a common monetary union, a common monetary policy but a different fiscal policy,” Board member Massimo Bordignon pointed out.
EFB chair insisted that “it is better to rely on central capacity rather than rely on undifferentiated systems, where we know that some countries are more vulnerable than others.”
However, “the Euro area is unable to build a majority in favour of the view that fiscal stabilization is a collective responsibility,” said Thygesen.
While some like France president Emmanuel Macron still defend the need for risk sharing in the Eurozone, other countries, and particularly The Netherlands, are staunch opponents of any stabilization mechanism.
“I would never support more stabilization mechanisms at eurozone level,” Dutch Prime Minister warned in an exclusive interview with EURACTIV.
“I don’t know if the use of European fiscal capacity is completely impossible,” Thygesen said, but he warned that “the Budget Instrument for Convergence and Competitiveness is at its minimal size so you can’t think of that as a stabilization instrument.”
Whatever the mechanism agreed upon is, it needs to be properly funded. “0.5% of the GDP of the euro area is the absolute minimum if we have to target stabilization of a systemic shock,” said Mateusz Szczurek, a member of the EFB.
That would work out at between €120 and 130 billion but the proposal for a European Investment Stabilization Function of the Commission does not go beyond €30 billion. “That would not be nearly enough to help stabilize a very deep recession,” insisted EFB member Roel Beetsma.
Such an instrument would be “another obvious mechanism for responding to unexpected large shocks,” Thygesen said, other than letting automatic stabilizers operate or increasing the flexibility in the Stability and Growth Pact.
“If the shocks are quite mild, it should not be a problem, even if the situation would be different in different countries. If there are bigger shocks, it would be desirable to have a bigger fiscal capacity,” Bordignon stressed.
Clouds in the horizon
Global trade tensions and the uncertainty created by Brexit are the two most important risks for the euro area in the coming months, according to the latest EFB report.
As the economy slows down, the Board has called on member states with high debt burdens, such as Italy or Spain, to follow the requirements of the Stability and Growth Pact and continue to consolidate.
To those like the Netherlands or Germany, which fiscal consolidation offers more room of manoeuvre, they should use it “more than they are currently planning to do,” particularly in the case of Berlin, said the EFB.