The process of monetary integration in Europe since the sixties has generated an everlasting discussion about the need for a fiscal policy and for a definition of its aim(s).
The Economic and Monetary Union’s main objectives have recently been restated in the 5 Presidents’ Report: “balanced economic growth and price stability, a competitive social market economy aiming at full employment and social progress” for all member states. Fiscal policy should then be one of the available means to achieve these goals. The textbook definition of fiscal policy simply refers to governments’ choices regarding levels of spending and taxation without referring to any objective of these policies. Thus, despite the lack of real convergence, should a European fiscal policy, whatever its structure, be designed with the sole objective to organize bailouts of national economies in case of emergencies?
A known criticism addressed at the EMU structure is the lack of such a common fiscal policy in case of asymmetric shocks hitting the euro area. Recent discussions about potential fiscal policy in the euro area almost exclusively refer to these cases of “shock-contingent bailouts”, not mentioning the potential need for a structural fiscal policy to foster real convergence. Nevertheless, the discussion on fiscal policy objectives should make a clear distinction between the consequences of asymmetric shocks and those of a potential lack of real convergence of the economies of the euro area, and at the same time, the interaction between real convergence and asymmetric shocks also has to be considered. Then, the question arises if market-oriented structural reforms will be enough to make euro area economies more resilient in case of asymmetric shocks and if they will contribute to real convergence among member states. The answer will be a two-component common fiscal policy.
A countercyclical component should be considered as an insurance instrument in case of asymmetric shocks and should be financed by national and European Stability Mechanism resources. This structure should take into account the two dominant approaches to public intervention in Europe: the ESM resources are based on a risk-sharing or solidarity approach between member states and above a certain threshold of sovereign debt, member states should issue junior sovereign bonds at market conditions, which refers to a market rules or responsibility approach. The advantage of such a structure is that the government bond market’s fragility will be considerably reduced.
For the structural component of a European budget, the EMU’s objectives have to be defined first of all in a more precise way, based on the initial European objectives. Then, indicators with defined thresholds should be established. After these clarifications, policy means have to be defined. Finally, the financial needs for these different polices have to be evaluated, hence a structural component of a European budget will be defined. An agreement needs to be found how to combine this European budget with national budgets and private investment initiatives.