Europe’s First Small Step Toward Fiscal Reform
The greatest weakness of the euro zone is that it lacks a way to support member states that fall into recession: Monetary policy isn’t enough, because the European Central Bank sets interest rates for the zone as a whole, and can’t direct its support to individual countries. French President Emmanuel Macron has advocated a joint euro-zone budget, but Germany’s Angela Merkel up to now has resisted, fearing this would lead to persistent transfers from strong economies (meaning Germany) to struggling ones such as Greece and Italy. An earlier agreement to work on the idea — the so-called Meseberg Declaration — seemed to be getting nowhere.
Last week, France and Germany published a plan. The idea is for all member states to contribute to a fund that could be used to support public investment. Crucially, as well as promoting competitiveness and convergence (the EU already has instruments for those purposes), this could also be used to help stabilize countries in difficulty. The fund would be part of the EU’s overall budget; only countries in compliance with the union’s fiscal rules would be eligible to tap it.
To be clear, it’s a small step. The designers haven’t said how big the fund would be: To be useful, it would need to be at least a few percentage points of euro-zone gross domestic product, a sum Germany is unlikely to accept. It would also be better if the new plan were entirely directed to stabilization, rather then concerning itself with other aims. The scheme should be a euro-zone initiative rather than an EU-wide scheme, because that would make it nimbler and more clearly focused on the problem at hand. And one shouldn’t forget that the euro zone still requires a lot of other work — including completion of its unfinished banking union.
Even so, this fiscal plan would be a notable and valuable innovation. Once it’s established, the fund can always be enlarged if events demand it, or be tweaked to make stabilization the primary task. In the meantime, it would offer proof that Europe can, after all, strengthen its economic governance without needing a crisis to force its hand.
Editorials are written by the Bloomberg View editorial board.
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