The eurozone is edging closer to having a budget.
Despite German reservations, new French President Emmanuel Macron has provided new impetus for the idea, which is supported by European federalists and those seeking an ‘ever closer union.’
Macron also supports the creation of a eurozone finance minister.
But how would it all work?
Would this mean paying a European tax? More bailouts? And where would national economic policy come into play?
French economist Jézabel Couppey-Soubeyran is the author of a new report commissioned by the EU that argues for pan-European financial bodies able to prevent and correct eurozone imbalances.
We spoke to her about what this budget might mean for Europe.
TPE How far down the line are European governments in creating a eurozone budget?
JCS At the moment a dynamic is developing, pan-European work groups are forming, bringing French and German people together to try and find a Franco-German consensus.
There is a palpable desire to find a consensus on issues such as eurozone reform, but it’s not going to be easy, the differences in approach and perspective are very noticeable.
TPE Do you get the feeling the French want to create a budget that is supplementary to the budget that already exists, with the addition of new resources? What kind of spending are they envisaging?
JCS It’s unclear at the moment, but the idea is to have a eurozone budget and finance minister.
This budget could only exist alongside some kind of European tax. It also relies on large institutional changes, which take a while. This is a middle to long-term project.
If we want to reinvigorate the eurozone, we have to implement these big eurozone-wide changes, as well as other schemes that can be rolled out quickly.
Economic policy can be improved swiftly, and relatively easily; the institutions already exist. That’s why I believe that whilst more complete eurozone reform is important, there are other, simpler changes that can be made in the mean time.
TPE What kind of policies would be implemented with this new eurozone budget?
JCS Again, nothing is certain.
If we want to put in place a eurozone budgetary policy, there has to be a budget.
Today, the European Union budget is ridiculously small. It’s around 1% of total GDP, which is completely insufficient if we really want to revive the EU.
At the European level, the ‘Juncker Plan’ has not been enough, though we are starting to see some green shoots.
TPE Does the idea of the eurozone budget, if it is designed to reinvigorate the EU, go hand in hand with a Keynesian economic policy?
JCS It doesn’t go hand in hand with Keynesian theory; it goes hand in hand with the basic precepts of economic policy, in particular when it comes to economic policy in a monetary zone like the eurozone.
In such a bloc we can’t leave everything to monetary policy. Why? Because it is designed for averages, so it doesn’t fit with countries in unusual macro economic situations.
Major divergences between eurozone countries means monetary policy can only go so far.
Having an instrument that can manage individual national situations by making temporary macro adjustments that can complement monetary policy is essential.
Budgetary policy can do that job, and above all it can boost economic activity. We must have this combination between budgetary and monetary policy, which doesn’t currently exist in Europe.
Another crucial point, which forms the basis of our argument in the report for the European Parliament (EP), is that in our financialised economies – by which I mean countries with strong financial sectors whose economies are cyclical – economic imbalances stem very often from financial imbalances.
Let’s take the eurozone a few years before the sub-prime mortgage crisis as an example. Eurozone economic policy was becoming monetary policy, which – as I said – is conceived using averages.
That led to interest rates that played into the hands of countries like Germany and France in the early 2000s, but were disastrous for the likes of Spain and Ireland.
The rate was simply not high enough for those countries, and this directly led to the credit boom. Financial imbalance led to economic imbalance.
TPE Which is why you propose to regulate via the European Systemic Risk Board (ESRB)?
JCS Our proposal consists of trying to warn of financial imbalances and regulate the financial cycle of each member state using the appropriate instruments.
This would be coordinated at a pan-European level, with decisions being taken by the ESRB. This way we would limit the creation of financial imbalances by regulating the financial cycles, which in turn would limit economic imbalances and divergence between countries.
So the eurozone actually needs a triple-headed economic policy. We must combine monetary policy with a budgetary policy as well as prudent macro-economic policy that prevents economic imbalances. The latter two must function across the eurozone as well as within each member state.
The ECB would of course be downgraded. But how much of a problem would that be? It has unlimited refinancing options; it’s not the end of the world.
The idea is to regulate the different countries’ financial cycles – which are currently rather out of sync – even when variations between eurozone countries are relatively small. Because there is always one cycle that is completely disconnected from the others: Germany’s.
That means that any contra-cyclical macro-economic policy is both tailored to each member state and coordinated at a European level. Letting each country decide on their own terms would be chaotic.
The eurozone must also strengthen the big national banks.
At the moment, all we have is monetary policy, which is not alone able to reinvigorate eurozone economies. It risks, in fact, creating further financial imbalances.
TPE Wouldn’t most of the budget be spent on countries with poor growth, the countries in the South? And wouldn’t this provoke resentment in Germany?
JCS There is a desire in France and Germany to come to a consensus, but at the working group meetings that I have been to it is clear that the Germans and the French see things from a completely different perspective.
The Germans don’t see any reason for wider budgetary coordination, so of course this project is going to be challenging.
But if we want a collective economic policy we need a budgetary instrument, which requires fiscal harmonisation, and – eventually – a European tax.
This is the only way we can have a functioning budgetary policy and a system to launch, for example, infrastructure projects, be it on a European or national level.
It would also us to complete the banking union by facilitating a common European-wide deposit guarantee.
TPE Today certain countries continue to spend despite mounting debt. What institution or policy would manage European fiscal discipline? The European Commission, which is currently in charge, is clearly not up to the task.
Certain countries had their public finances downgraded because of the financial crisis, and they are still paying the price for it today.
This must be seen as a consequence of the financial crisis. Austerity and budgetary rigour are counter-productive, and only delay the revival, as they limit how much public finances can be improved.
What these countries need is a boost to investments, jobs, and growth.
TPE Enrico Letta [the former Italian PM] said that Italy’s financial woes were principally caused by the inept economic policies of the last 25 years when we interviewed him recently.
JCS It’s true that Italy hasn’t exactly been a model for good governance.
The financial crisis also did damage to Italy, but it’s true that financially it’s not like Spain or Ireland. The banking sector doesn’t look like others in Europe; it is made up of smaller poorly run firms who are burdened with bad debts. Yet they haven’t suffered as much as other banks in other countries, it’s an unusual situation.
Italy suffered from bad governance. The eurozone should have seen this and acted upon it.
Our idea is that some kind of eurozone governance would plot the bloc’s course and ensure the member states respect the directives.
TPE What are the consequences of the monetary policy pursued by the European Central Bank (ECB) over recent years? Is their quantitative easing risky?
JCS The ECB’s problem is similar to the one I mentioned earlier. It is completely alone in trying to conduct the adjustment and revival of the eurozone during the crisis.
This means the ECB had to conduct an extremely tough monetary policy, which eventually ran idle and the more positive consequences of the quantitative easing were rather belated.
We are starting to see the beginnings of renewed growth and investment in the eurozone, and inflation is very slowly getting back on its feet at roughly 1% – far from the ECB’s aim of just below 2%.
Austerity and budgetary rigour are counter-productive, and only delay the revival.
So these marginally positive consequences came at the cost of very unsatisfactory monetary policy.
If, however, it had been complemented by budgetary policy with the same goals, we would have run much less risk of destabilising the banking and financial sectors later on. Because sudden injections of cash flow can bring about financial bubbles.
It may even be the root cause of the European housing bubble, which has been caused by extremely low interest rates that form part of the clunky monetary policy and are a result of the ECB’s quantitative easing.
We must not only combine monetary and budgetary policy, but also follow macro prudential policies to be in lock step with the big financial institutions, the credit cycle, asset price fluctuations, and to be able to intervene when things begin to get out of hand.
So when we start to see house prices rocket, for example, it’s then that we must act. Ireland already does it; they’ve learnt lessons from what happened to them before the crisis and have started taking macro prudential measures to keep the housing market on an even keel.
But such action needs to be coordinated throughout the eurozone, not just in Ireland.
TPE Isn’t it risky to have the ECB as the main creditor for struggling eurozone countries?
JCS The objective of this unconventional monetary policy is to make the ECB not only a creditor of last resort but also an investor of last resort.
This means the ECB would take on assets that no one else wants – but that it alone is capable of absorbing – which would increase the value of these assets and support the corresponding markets.
The ECB would of course be downgraded. But how much of a problem would that be? It’s actually the only institution that can be downgraded – temporarily – without taking too much of a hit, unlike national banks. It has unlimited refinancing options; it’s not the end of the world.
TPE Do you think the ECB will end up writing off part of the Greek debt?
JCS That would be the reasonable thing to do.
It’s a curious, crazy situation. The new aid that has been granted has paid for interest and charges, but has not helped the Greek state revive its economy.
They are going to have to write off the debt, or at least reduce them.
TPE So the ECB will take responsibility for the private banks’ bad debt?
JCS Yes, and that’s exactly why policies must be pursued to prevent financial imbalances, rather than having to pick up the pieces after the event.
The emphasis must be on prevention rather than cure.
Before the crisis we were convinced we could allow financial booms run their course because they helped growth, thinking we could clean up the mess afterwards. But we can’t, it’s extremely costly, and it means we’re always preparing for the next financial crisis.
The only solution is macro prudential preventative policy coordinated with monetary and budgetary policy.
TPE How can Europeans be convinced that the euro still benefits them when they have been deprived of the benefits they were promised?
JCS If the euro hasn’t delivered prosperity, and caused divisions between member states, it’s precisely because eurozone economic policy has been poorly conceived and poorly conducted.
There is another way.
For everyone to feel more European we need more joint projects. The only tangible thing we have in common at the moment is the euro, but we need more than just a common currency, especially when there is no European state.
More European institutions – a European civic service, for example – would foster a stronger sense of a European identity.
But the idea of adopting a common language, which logically would be English, seems somewhat utopian. In the midst of Brexit the idea feels like a bit of a joke.
TPE But it would reduce unemployment.
JCS It would certainly mean lots of work for English teachers!
TPE It would also increase mobility.
JCS Of course, but you can increase mobility with a European civic service, obligatory European internships for university students etc.
All there is for increasing mobility at the moment is the Erasmus programme, and while it’s great, it isn’t large-scale enough.
Other options are cross-national unemployment benefits and work contracts. Only via such projects can we create more of a European identity.