The European Fiscal Board has discredited the Commission’s proposed fund to protect investment as “very modest”, “narrow” and not well designed, its chair Niels Thygesen said on Monday (18 June).
Speaking to a group of reporters, Thygesen also pointed out that the new stabilisation fund would not function properly without better fiscal rules, proposing a “simpler and stronger” Stability and Growth Pact.
He said that the “minimum size” of the new “European Investment Stabilisation Function” should be at least 0.5% of the eurozone’s GDP (€70 billion), and he recalled that the executive and the IMF have already suggested a fund of around 1% of GDP.
In order to be able to deal fully with a euro area-wide shock or a country-specific shock, the fund should reach around 1.24% of the bloc’s GDP, the Board estimated.
Instead, the Commission proposed allocating €30 billion to the new instrument.
Thygesen also considered that the new instrument is “too limited” as it would only act to maintain public investment in times of asymmetric shocks.
Finally, the Board chairman pointed out that more “economic judgement” should be introduced in the automaticity to activate the new fiscal tool. In the Commission’s proposal, unemployment peaks are the only criteria to trigger the stabilisation tool.
Despite the broad criticism of the Commission’s proposal, Thygesen did not want to describe the proposal as “flawed” but “insufficient”.
He said the Commission has done “the groundwork” but it should be completed by pouring more funds and breaking the automaticity in the mechanism.
Overall, the board considers more suitable the IMF’s proposal of a rainy day fund, in which member states would contribute to a common pot in good times, and it would disburse funds when turbulence hits the national economies.
Instead, the Commission proposed a system of soft loans where only the interests would be covered by the EU.
Chancellor Angela Merkel and French President Emmanuel Macron are due to meet on Tuesday to discuss eurozone reform proposals, including fiscal instruments to stabilise the region in times of distress.
Review of fiscal rules
For the Board, setting up the new investment shield is tied to the review of the EU’s Stability and Growth Pact, in order to make it “simpler and stronger”.
Echoing the debate in other elements of the eurozone reform, the board said that tightening the fiscal rules would help with the reduction of risks, seen as a necessary step by some member states in order to progress with the mutualisation of risks and the creation of common fiscal instruments to deal with shocks.
The fiscal authority considered that the ‘flexibility’ introduced in the rules in 2015 made sense given the difficulties of the European economy in returning to growth back then.
But as the expansion gained ground, countries should adjust more and the exemptions introduced three years ago are no longer relevant. “More symmetry” should be introduced to request bigger efforts to governments in order to build fiscal buffers.
Recalling the missed opportunity of the boom years before the previous crisis, Thygesen said it is “time for fiscal policymakers to stay clear of the missteps of the past”.
“The current expansion offers a clear opportunity to create fiscal buffers,” he wrote in the assessment of the fiscal stance appropriate for the euro area in 2019, presented on Monday.
As a result, the board recommends a “somewhat restrictive orientation of the fiscal policy” for the eurozone next year.