chapter  9
40 Pages

Does the euro need a fiscal union? Some lessons from history M I CHA e l B O RDO , lARS J O NuNG A ND

The euro area is a unique form of a monetary union – with no historical precedence. The member states of the euro area have assigned the framing of monetary policy to a common monetary authority, the European Central Bank (ECB), set up as a highly independent central bank to ensure that it will be able to carry out a policy of price stability. Fiscal policy within the European Union (EU) remains the task of the national governments under a set of rules given in the Maastricht Treaty and the Stability and Growth Pact (SGP). These rules, pertaining to the Economic and Monetary Union (EMU), cover euro-area member states as well as member states that have not adopted the euro. They are monitored centrally by the Commission in a policy dialogue with the member states. This system represents the existing fiscal policy framework of the euro area that complements the monetary union and its single currency, the euro. Ever since the plans for a single European currency were launched about 20 years ago, the institutional system for framing fiscal policies and for preserving the fiscal sustainability of the monetary union has been the subject of a heated debate – among economists as well as among policy-makers.2 The 2007-09 global financial crisis has added new impulses to the debate about the proper fiscal policy arrangements within the EU. Several views exist. According to one camp, the monetary union should be supplemented with an extended supranational or pan-European fiscal union to be viable and sustainable. In short, the EU should have access to a larger budget in order to design and carry its own central fiscal policies. Some go further and promote the idea of a deeper political union, like De Grauwe (2006), to ensure the success of the euro. The present debt crisis with the EMU has inspired a number of proposals for strengthening the fiscal power of the EU. Others argue that such an extension of the fiscal powers of “Brussels” would not be accepted politically by EU citizens, threatening the political support for the monetary union in some member states, in particular in Germany. Instead, it is argued that the present institutional set-up is roughly the proper one. Some commentators propose that the monetary union is not in need of any central fiscal coordination across the member states, or at least of less coordination than

presently. For them, like Mckay (2005), the fiscal policy framework should be solely the business of the member states. Another school recommends improvements in the quality of the fiscal policy process and the fiscal institutions across the EU as a promising way to go to improve fiscal policy governance in the EU.3