Macron proposal for eurozone budget poses problems but other options exist
The campaign for a eurozone budget is a distraction. French President Emmanuel Macron is among those pushing for a fund, financed by taxpayers, to help counter economic shocks. But comments from European Commission chief Jean-Claude Juncker showed the idea is a stretch. Other less dramatic – and less expensive – reforms might achieve the same result.
Though the eurozone has narrowly avoided a breakup, it needs a better way to manage downturns. Countries within it cannot devalue their currencies, and fiscal rules prevent governments from boosting spending when growth slumps. A central fund or budget could help. The European Union’s central budget is about 1 percent of GDP – a fraction of that of the US federal government, which distributes roughly a fifth of the US’ economic output each year. It’s true that poorer EU members already receive chunky net contributions. Nevertheless, to be effective a central fund would have to be able to deploy somewhere between 2 percent and 3 percent of GDP – in line with the fiscal stimulus after the 2009 financial crisis. That would be 200-300 billion euros ($168-$252 billion) for the single currency area as a whole.
Pooled spending on that scale is a non-starter for Germany, which opposes fiscal integration unless it is matched by greater political unification. Though Chancellor Angela Merkel recently endorsed the idea of a European Monetary Fund, she said it should be based on “small contributions.” As for Juncker, he suggested recently that the eurozone ought to have a finance minister to coordinate economic policy across the bloc, but not a separate budget.
The eurozone can take other steps to reduce the risk of self-perpetuating local slumps. Banking union, which centralized responsibility for policing and winding up big lenders, has already reduced the risk that states will have to step in, as they did in 2008. But it has shortcomings. A common deposit insurance scheme for the eurozone would further weaken the fiscal link between banks and governments. Another option is to exclude investment from government deficit targets, so that countries can keep spending on infrastructure in a downturn.
The eurozone could also redeploy unused capacity in the European Stability Mechanism – the fund used to bail out Greece. With 376 billion euros of firepower, this is already big enough for the job. And because the ESM makes subsidized loans that countries must pay back, it would not involve open-ended fiscal transfers. These options may be less sweeping than the fund proposed by Macron. But they could be just as effective and have a better chance of success. The authors are Peter Thal Larsen and Neil Unmack, Reuters Breakingviews columnists. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn