By: Aleksandra Polak, Communications Officer
Spanish Prime Minister Mariano Rajoy recently announced that Spain will advocate for deepening the Economic and Monetary Union (EMU), creating a euro area budget, and introducing Eurobonds. Rajoy is not the first European leader to reinforce an idea that has been around for years: a separate budget for the Eurozone was one of French President Emmanuel Macron’s slogans during his electoral campaign, and calls for deeper integration have been repeatedly mooted as a solution for the Eurozone crisis. Furthermore, the concept has been endorsed by the European Commission and by the European Parliament. But what would the creation of a separate Eurozone budget mean for Member States outside the currency union?
A possible Eurozone budget, also labeled the “euro area fiscal stabilization capacity,” would be a step toward much deeper integration (and is argued would be the way to complete the Economic and Monetary Union). Based on principles of counter-cyclicality and stabilization, it would remain distinct from the European Stabilization Mechanism, the instrument for severe crisis management. Indeed, the Eurozone budget’s role would be to guard against asymmetric macroeconomic shocks in the euro area. Moreover, it is also envisaged as a mean of reducing economic divergences between Member States — a prerequisite for ensuring sustainability of the single currency and containing rising populism, according to the European Commissioner for Economic and Financial Affairs Pierre Moscovici, another high-level advocate of a euro zone budget.
Creating a euro area fiscal stabilization capacity, as well as implementing other means of deepening Eurozone economic integration (such as introduction of a position of an EU finance minister, a European treasury emitting Eurobonds, or euro-area unemployment insurance), will inevitably lead to growing divergences between euro area Member States and the remaining EU countries. Adoption of new supranational instruments will bring on a progressive federalization of economic and fiscal governance in the Eurozone, with non-euro countries excluded from this process and lagging behind. Marginalization and decreasing impact on decision-making will likely also make it politically more difficult domestically for the peripheral countries to join the Eurozone later on. On the other hand, non-euro EU countries are strongly economically tied to the Eurozone, so the single currency area’s improved resilience against shocks and crises could be beneficial to its economic partners as well. Moreover, countries such as Poland are reluctant toward adopting the single currency precisely to protect their economies from crises. Therefore, making the Eurozone more crisis-resistant could be an incentive for those Member States to join in.
The European Commission “opened a debate about a fully-fledged euro area budget” in its latest Reflection Paper on the Future of EU Finances. Introducing such a budget is a complex and problematic issue. Firstly, the idea is highly politically sensitive in Germany, averse to the possibility of debt pooling and subsidizing southern Member States. Secondly, it is estimated that for an effective stabilization role, the budget would have to be as high as 5 to 7% of euro area GDP. A consensus concerning the source of financing (options include an assigned tax, a fee-based system or contributions from Member States) will be difficult to reach. Thirdly, introducing this kind of instrument would require a transfer of certain national competences to supranational level, which would be a controversial and difficult step. The budget could be probably only be introduced after 2025, following completion of other parts of the Economic and Monetary Union, such as the Banking Union and the Capital Markets Union.
Nevertheless, it seems that the euro area leaders are determined to press forward with the euro project and its apparently necessary complement. Despite the political challenges, euro area members appear determined to deepen economic integration and introduce instruments meant to increase convergence in the euro area (whether or not this will occur is open to debate, however). This should be taken into account by countries which still have their own currencies but are legally obliged to join the Eurozone: Bulgaria, Croatia, Czech Republic, Hungary, Poland and Romania. For now, they are not hurrying to adopt the single currency, appreciating a greater degree of flexibility that stems from independent monetary policy. However, if the Eurozone takes the EMU reform forward, these countries might find themselves on the political peripheries of the EU with no easy way back.