Public funding of failing banks in the European Union (LBF vol. 19) 2020/1.4.4:1.4.4 Moving towards a Fiscal Union?

Public funding of failing banks in the European Union (LBF vol. 19) 2020/1.4.4

1.4.4 Moving towards a Fiscal Union?

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For many observers, the only lasting solution to the GFC is a decisive shift towards the fiscal unification of the Eurozone, as a result of which individual Member States cede substantial sovereignty over taxation and public spending decisions to a central Eurozone fiscal authority in return for which their debts are underwritten by the Eurozone as a whole. Further restriction of national autonomy over domestic financial policies within the Eurozone could be justified by virtue of spillover effects that characterize the currency union within the Eurozone.1

As a step towards a Fiscal Union, the reformed Stability and Growth Pact (SGP) of 20052 required Member States to (a) adhere to the excessive deficit criteria and (b) abide by the medium-term budgetary objective of positions close to balance or in surplus once they join the Eurozone.3 As a result of the GFC, the EU took further significant steps towards a Fiscal Union, putting in place a permanent bailout fund, the ESM. Also, to prevent excessive deficits and debts from emerging in the first place, new mechanisms were put in place for tighter EU monitoring of national budgets and for strict, judicial enforcement of national deficit and debt limits through the so-called Six-Pack and Two-Pack.4 Ultimately, any State – in the Eurozone or beyond – that wants to have access to the ESM in times of crisis was required to ratify a new Fiscal Compact Treaty.5 On 1 January 2013, this treaty entered into force following its ratification by 12 Eurozone Member States.6 The Treaty sets out certain balance rules on fiscal stance that Member States have to implement at national level. It also imposes limits on the size of public debt and structural deficit, covering similar ground to previous instruments, such as the SGP and the Six-Pack. The most important addition in this respect is the obligation to implement rules on budgetary discipline into national law. In addition, the Member States undertake ‘to work jointly towards an economic policy that fosters the proper functioning of the economic and monetary union’, through ‘enhanced convergence’.7 Compliance with the EU fiscal framework however remains weak and the Fiscal Compact Treaty by no means implies a Fiscal Union.8 On 21 October 2015, an independent European Fiscal Board was created to act as an advisory body to the Eurozone’s system of multilateral economic monitoring. This advisory entity coordinates and complements the national fiscal councils that have been set up in the context of the Council Directive on requirements for budgetary frameworks of the Member States.9 It provides a public and independent assessment, at EU level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal governance framework.10

The Five Presidents’ Report identified that, as a further step, a Eurozone-wide fiscal stabilisation function should be created to better deal with shocks that cannot be managed at the national level alone.11 The function should not lead to permanent transfers and should not duplicate the role of the ESM as crisis management tool, but should minimise moral hazard. The Commission has flagged three options for this type of stabilisation function. The first option is to create a European Unemployment Reinsurance Scheme (EURS). The Commission has also proposed to set up a European Investment Protection Scheme (EIPS). Under this scheme, Member States would automatically be entitled to benefit from assistance, subject to strict eligibility criteria and triggering mechanism. This assistance would consist of loans and grants provided through the EU budget, the ESM and an insurance mechanism based on voluntary Member States’ contributions. A rainy day fund accumulating funds from Member States to cushion a large shock could accompany the EURS and EIPS. National budgets will how ever continue to be the main fiscal policy instrument for Member States to address changes in economic circumstances. A stabilisation function at European level would only complement the stabilisation role played by Member States’ national budgets.12 At the time of writing this dissertation, none of these stabilisation functions had been realized (yet).

According to Berger, Dell’Ariccia and Obstfeld the steps to equip the Eurozone with the beginnings of a full Fiscal Union involve complicated institutional decisions, reallocation of sovereign power, and questions of democratic accountability. Without more tangible elements of a Fiscal Union, the Eurozone will, however, remain fundamentally vulnerable to shocks.13

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