FISCAL REFORM

European fiscal policy: Situation and reform prospects

The creation of a single currency and subsequent loss of national monetary sovereignty means that eurozone countries must rely mainly on fiscal policy to fight recessions and avert the excesses often associated with expansionary periods. However, in some instances, existing European coordination rules may exacerbate business-cycle imbalances, rather than correct them, sparking the debate over the kind of reforms that can provide the eurozone with effective counter-cyclical policy instruments.

Raymond Torres

Abstract: The creation of a monetary union rules undertaken in response to the by definition entails the loss of national financial crisis. Indeed, under the current monetary sovereignty. As a result, eurozone coordination system, fiscal policies tend to member states have to rely on budgetary be pro-cyclical, which exacerbates business- tools in order to tackle macroeconomic cycle imbalances, limits growth potential shocks. In practice, however, these countries and hinders the scope for debt relief. face serious constraints in implementing Secondly, Europe lacks the kind of supra- counter-cyclical fiscal policies at the national instruments which would help national level. This is due, firstly, to the fiscal counteract the inability of national fiscal

15 policy to mitigate shocks. This conundrum mechanism that takes into consideration the has spurred a debate over potential fiscal position of the EU as a whole. But these eurozone reforms that could include: are merely ideas and projects that have yet to i) changes in the rules that coordinate be translated into concrete actions. national fiscal policies; and, ii) stronger European-wide fiscal instruments, such This article aims to analyse the current as an EU-level investment fund or situation and future prospects of European unemployment benefit, a “rainy-day”, fund fiscal policy. First, existing mechanisms are reviewed from the perspective of both cross- or the creation of a eurozone treasury capable country coordination and available European- of enacting counter-cyclical policies similar wide tools. Secondly, the impact of existing to those seen in the United States. [1] mechanisms on budgetary imbalances, growth and employment is examined. Although the Introduction findings are primarily based on qualitative Ever since the creation of a single currency, analysis, they also take into consideration key eurozone governments’ ability to exert trends and the results of several quantitative economic influence and counter financial studies. The article concludes with an shocks mainly relies on budgetary tools. Fiscal overview of possible fiscal policy reforms. policy has therefore become the mainstay of macroeconomic management for these Coordination of national fiscal countries. policies In theory, fiscal policy can ease the effects ofa The EU’s current fiscal policies coordination recession and pave the way for consolidation procedure is based on decisions adopted once the economy begins to expand. However, in 2011 when the sovereign debt crisis was in in practice, fiscal policy has failed to play the full swing. The financial crisis that led to counter-cyclical role that was expected. [2] Lehman Brothers’ collapse in 2008 had a dramatic impact across both developed and Since the onset of the sovereign debt crisis in emerging economies. In response, European 2010, the has enhanced fiscal countries joined the global effort to combat policy rules and coordination procedures, recessionary pressures by means of fiscal especially within the eurozone. This process stimulus measures. For example, the has been characterized by the EU’s effort agreed to provide coordinated fiscal support to contain fiscal deficits through closer that amounted to around 2% of of member states’ public finances. GDP. [3] This increase in government The tightening of the Stability and Growth spending resulted in a widening of public Pact (particularly after adoption of the “fiscal deficits and higher public debt. compact”) represents the cornerstone of this policy (Begg, 2018). The first “green shoots” of recovery appeared at the beginning of 2010, including in . More recently, the debate has centred around Consequently, that year, the European the possibility to widen the range of changed its policy position and fiscal policy instruments. Thus, supranational advocated instead a tighter fiscal stance. measures are now being considered, such as In retrospect, it is clear that the European the creation of a European instrument for Union underestimated both the risks of counter-cyclical management and a follow-up financial fragmentation inherent to the

In retrospect, it is clear that the European Union underestimated “ both the risks of financial fragmentation inherent to the eurozone and the economic impact of a restrictive fiscal policy carried out in crisis times. ”

16 Funcas SEFO Vol. 7, No. 5_September 2018 European fiscal policy: Situation and reform prospects

European fiscal rules have tended to operate as a pro-cyclical device, “ thereby weakening the ability to face shocks. This has had a cost in terms of growth and jobs. ” eurozone and the economic impact of a subject to corrective measures. Under such restrictive macroeconomic policy. It is during circumstances, the Council is authorized to this period that the EU designed its current make decisions regardless of the vote cast system of coordination of national fiscal policies. by that member state. This corrective leg of the Pact is known as the Excessive Deficit How does the present fiscal policies Procedure (EDP). In essence, the EDP is coordination system operate? activated when fiscal imbalances do not meet certain criteria (i.e., a 3% of GDP deficit European coordination of national fiscal limit). [5] policies consists of a complex set of rules, recommendations and codes of conduct Determining member states’ compliance with (Wieser, 2018). these criteria lies with the Council, which bases its decision on a report issued by the In 2011, the Stability and Growth Pact was Commission. The Council can request that strengthened (Regulation 1173/2011) through a member state adopt corrective measures the adoption of preventive actions in order within a time span of less than 6 months. In to forestall excessive public deficits. This cases of repeated non-compliance, the Council decision reflects an acknowledgement of the can enact sanctions of up to 0.5% of the GDP interconnection of economies belonging to of the country concerned. If the member state the economic and monetary union, thereby has hindered the follow-up mechanism or necessitating macroeconomic surveillance manipulated statistics, additional sanctions under the guidance of the European may be imposed. Commission (Article 121 of the Treaty on the Functioning of the European Union). Finally, the Fiscal Compact, which came into force in 2013, includes a “golden rule”, This preventive surveillance mechanism whereby a member state’s public deficit consists of three key parts: i) a deficit target cannot exceed 0.5% of GDP over the business adjusted for the of no more than cycle (1% for low-debt countries). The golden 1% of GDP in order to meet the medium-term rule is binding for all countries that have objective of achieving a structural balance in ratified the Pact (i.e., all EU member states, public finances; [4] ii) member states’ annual except Croatia, the United Kingdom and the submission of a stability program to the ). Importantly, each member and Commission outlining state must incorporate the golden rule into medium-term objectives and their underlying a law. assumptions; and, iii) the Council’s opinion including its recommendations which are then In the case of Spain, the principle of fiscal incorporated into the European Semester. stability is contained in Article 135 of the If the Council’s recommendations are not Constitution. Legislation also provides for adopted, a country can face sanctions of up to an “expenditure rule”, limiting the increase 0.2% of GDP. of non-financial spending to nominal GDP growth over an entire business cycle. In addition to these preventive measures, the Stability and Growth Pact also states In principle, a member state can appeal to the that a country which consistently deviates European Union Court of Justice if it believes from the balanced budget goal can be another member state has contravened the

17 golden rule. Additionally, financial support However, fiscal coordination faces major granted by the European Stability Mechanism challenges. The main one is the pro-cyclical is reserved solely for countries that have nature of adjustments resulting from present ratified the Fiscal Compact. coordination rules (Exhibit 2). This is a key issue, indeed a pro-cyclical fiscal policy What has been the impact of the –besides wasting the only macroeconomic present fiscal policies coordination management tool available for the eurozone countries– tends to aggravate the impact of system? recessions on growth and unemployment. The EU began to tighten fiscal policy rules Some authors have identified a negative impact as the financial crisis intensified but their of pro-cyclical fiscal policy on the European actions became particularly aggressive economy, in terms of both aggravating the following the adoption of the above-mentioned depth of recessions and reducing long-term 2011 regulations and 2013 Fiscal Compact. growth (Fatás and Summers, 2017). These policies effectively contributed to a downward trend in public deficits across It is a fact that fiscal policy has been tightened the EU (Exhibit 1). Obviously, the reduction during the downturn phase caused by the debt in interest rates due to the ECB’s shift in crisis (Bénassy-Quéré et al., 2018). During monetary policy in 2012 also played a role. the hardest years (2011-2013), virtually all However, the primary deficit, which excludes countries adopted austerity measures. Hence interest payments and is therefore less the structural deficit reduction of 2 percentage affected by ECB policy, has also decreased. points –whereas fiscal policy support is to be expected in times of cyclical economic In addition, the public debate is increasingly downturn. The impact was particularly acute aware of the importance of balanced budgets. in those countries most affected by the credit For example, in many countries, European crunch. [6] mechanisms have triggered a dialogue among governments, social partners, the European Furthermore, in contrast with what would Commission and scholarly experts. be desirable, recovery is characterized by

Exhibit 1 Public deficit as a percentage of GDP

10

5

0

-5

-10

-15

-20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Eurozone Minimum Maximum

Sources: Eurostat, Haver Analytics and Funcas.

18 Funcas SEFO Vol. 7, No. 5_September 2018 European fiscal policy: Situation and reform prospects

Exhibit 2 Fiscal policy has been pro-cyclical in the eurozone

1 Cyclically adjusted balance and output gap

0

-1

-2

-3

-4

-5

-6 2010 2011 2012 2013 2014 2015 2016 2017

Cyclically adjusted balance (% of Potential GDP) Output Gap (% of Trend GDP)

Sources: AMECO, IMF and Funcas.

a loosening of consolidation efforts. The either increased their deficit (Denmark and fact that the deficit experienced a strong Sweden) or kept it at the same level (United contraction in the 2010-2012 period in all Kingdom) during the 2010-2012 period. On eurozone countries (in Spain, the reduction the contrary, fiscal policy has been generally period was somewhat longer) is significant. restrictive since recovery began in those During that period, eurozone GDP went from a countries. Today, Denmark and Sweden 2.1% increase in 2010 to a 0.9% decrease in enjoy a comfortable surplus and the United 2012 (a slowdown of 3 percentage points). Kingdom has reduced its deficit.

On the other hand, the fiscal consolidation The second problem of the coordination process has slowed down during the ongoing system lies with the asymmetric treatment expansionary period. In most member states, of deficit versus surplus countries (Bofinger, the structural deficit has hardly undergone 2018). European institutions are relatively any change, and it may have even increased, demanding towards countries requiring fiscal as in Spain. This partially owes to the need adjustment, while they are more benevolent for reversing some of the restrictions applied in surplus situations. As a result, fiscal policy during the recession period –expenditure tends to be globally contractive, especially in reduction or tax increases. periods of recession.

Meanwhile, the main European countries This deflationary bias, which reflects the not participating in the single currency measures adopted during the sovereign debt

In 2017, the eurozone’s current account surplus reached nearly “ 400 billion euros, the highest level since the creation of the single currency and illustrating a chronic shortage of investment, possibly related to the way fiscal policy operates. ”

19 Table 1 Current-account balance

(In billions of $)

2010 2017 Difference Eurozone -7.7 +442.4 +450 +237.8 +164.9 -72.9 United States -430 -466.3 -35.5 United Kingdom -92.3 -106.7 -14.4 Rest of the world +292.8 -34.3 -327.2

Source: IMF and Funcas.

crisis, may have contributed to the sharp have adopted a combination of expenditure increase in the eurozone’s current account constraints and tax increases, show that there surplus (Table 1). In 2017, the surplus is more than one way to reduce a fiscal deficit. amounted to almost 400 billion euros, the highest level since the creation of the single As a result of the risks associated with currency. That is to say, the Eurozone is such asymmetries, the European Semester characterized by insufficient investment, in now relies on a new methodology, which relation to available savings. Imbalances are emphasizes evaluation as a tool to improve the highest among leading world economies, expenditure and tax efficiency, thereby representing a source of global concern – reducing the need for spending cuts. This besides fueling the protectionist discourse approach also encourages the creation of outside Europe. independent fiscal authorities –such as the Airef in Spain– tasked with considering a European Semester recommendations also wide variety of corrective options. The idea tend to be asymmetric as they are more is that each country should consider the path coercive regarding public expenditure than which fits best with its particular priorities tax measures. This is a relevant issue as and collective choices. adjustments by means of expenditure cuts during a recession tend to have a greater Third, the current system has so far had a effect on the economy than tax increases. This mixed impact on the long-term prospects is particularly true for high-income taxpayers for public debt, having de facto functioned whose consumption levels are more difficult as a short-term deficit device. [7] True, the to influence (Berger et al., 2018). present environment of moderate growth and low inflation has not favoured debt The relatively successful experiences of reduction (Exhibit 3). Moreover, states have countries like Portugal or Sweden, which been compelled to assume liabilities from

“ European fiscal rules also tend to be asymmetric as they are more coercive regarding deficit countries than surplus ones. ”

20 Funcas SEFO Vol. 7, No. 5_September 2018 European fiscal policy: Situation and reform prospects

Exhibit 3 Debt has increased more in the eurozone than outside it

110 Public debt as a % of GDP 100 90 80 70 60 50 40 30 20 10 0 Eurozone Denmark-Sweden Median

2007 2017

6 Interest payments as a % of public debt

5

4

3

2

1

0 Eurozone Denmark-Sweden Median

2007 2017

Sources: Eurostat, AMECO, Haver Analytics and Funcas.

the private sector, such as those associated include increasing technological capital or with losses in the financial sector. However, improving a country’s infrastructure. By the rising debt levels have attracted little contrast, in other cases, governments have attention as part of the coordination system. resorted to debt in order to meet current A medium-term strategy for tackling debt, consumption and transfers. Financial burdens while supporting growth and job creation is associated with such debt will be difficult to missing. carry, especially when interest rates increase.

Moreover, greater consideration should be Supranational fiscal policy tools given to the fact that public debt may reflect Besides the ability to coordinate fiscal policy different realities. In some cases, countries across countries, the EU can also influence get indebted in order to fund investment and macroeconomic developments directly through growth-enhancing policies, thus fostering its own budget tools. This includes structural potential growth and facilitating debt funds and the investment initiative known as reduction in the medium term. Examples the “Juncker Plan”.

21 The ECB cannot discriminate among member states, which “ means the only strategy available to combat economic shocks is fiscal policy. ”

However, available fiscal capacity is limited, European instruments have also had limited especially when compared with large federal success in achieving cross-country convergence states like the United States. In particular, within the Eurozone. The convergence process the tools are not up to the task of confronting has in fact slowed in recent years, as illustrated asymmetric shocks. The reunification of by the marked unemployment differentials Germany or the bursting of the real estate that presently exist (Exhibit 4). bubble in Spain are examples of the sort of shocks that required a specifically tailored macroeconomic response. In the past, the A comparison of productivity and investment exchange rate could act as a key adjustment rates leads to similar conclusions. This mechanism in such situations. However, by analysis highlights the need to capitalise definition, this option is not possible in the on new technologies, notably the incipient Eurozone under a single currency regime. artificial intelligence revolution. R&D, patents and robotics indicators also point to a divergent scenario, which pose a challenge to In addition, having renounced to the European integration. monetary tool in favor of the ECB, which, by nature, cannot discriminate among member states, the only room for maneuver left is to Lastly, the creation of the eurozone coincided be found in fiscal policy. And, fiscal policy is with a lack of monetary support for member conditioned by the criteria established in the states to overcome insolvency crises –the Stability and Growth Pact, which in practice so-called “original sin” of the euro (Bofinger, limit its responsiveness to asymmetric shocks. 2018). In countries outside the eurozone

Exhibit 4 Divergences in unemployment rates

25 21.2 20 16.8 15 10.911.6 8.8 8.9 9.6 10 7.4 8.0 6.2 6.6 7.1 5.1 5.3 5.7 5.7 3.6 4.2 4.2 4.3 4.4 5 2.4 2.5

0

Unemployment rate as a % of active population. NSA (1st1st quarter 2018)

*Data from 4Q2017. Source: Eurostat and Funcas.

22 Funcas SEFO Vol. 7, No. 5_September 2018 European fiscal policy: Situation and reform prospects

Exhibit 5 Spanish public administrations debt held by the Euro-system (ECB) and by all other sectors

270 1,055 240 1,035 210 1,015 180 995 150 975 120 955 90 935 60 915 30 895 0 875 M AM J J A S O N D J F M AM J J A S O N D J F M AM J J A S O N D J F M AM J J A 2015 2016 2017 2018

Debt held by the ECB (left) Debt held by all other sectors (right)

Sources: ECB, Bank of Spain and Funcas.

(and of course in the US), the public treasury of bank balances to national public debt. is backed up by the central bank which is Furthermore, a mechanism is needed to empowered to confront financial crises. These confront solvency crises that occur when a occur, for instance, when capital flows face state is unable to assume its debt burden. To “sudden stops” or other reasons unrelated to that end, the European Stability Mechanism the sustainability of public finances. (ESM) was created. However, the rule of unanimity and consultation of all national parliaments represents a major hindrance The sovereign debt crisis in 2010 was caused in this respect. Some analysts therefore by such an episode of sudden stops. Thanks advocate for a transformation of the ESM into to ECB intervention, and especially to the a European monetary fund with decision- public debt securities purchase programme, making capacity dependent on a qualified the risk has receded, though not completely majority. disappearing. Thus, normalization of ECB monetary policy poses a serious challenge, Reform options particularly for highly indebted countries such as Spain, all the more since nearly 20% The reform debate currently pivots around of their debt is placed in the Euro-system two main issues: i) the establishment of mechanisms intended to reinforce cross- (Exhibit 5). country coordination, including the possibility of simplifying the Stability Pact, In order to avoid new financial crises, it is harmonizing tax bases and fighting tax evasion; crucial to complete the eurozone’s banking and, ii) the establishment of fiscal mechanisms union, which would reduce the exposure at the European level, such as European

“ Normalisation of ECB monetary policy poses a serious challenge, particularly for highly indebted countries. ”

23 Investments in new technologies and other intangible assets, “ financed though short-term deficits, foster productive potential and the ability to increase tax collection in the future. ” investment protection and unemployment thorough formulation of fiscal objectives insurance/reinsurance strategies, a fund for would consider alternative budgetary choices. extraordinary contingencies (i.e., a “rainy- day” fund) or even more ambitious proposals Secondly, fiscal policy must take the business implying the creation of a Eurozone Treasury cycle into account, and avoid expenditure capable of developing a counter-cyclical fiscal cuts and tax increases during recessionary policy. periods. As noted above, a pro-cyclical trend of reducing imbalances is counter-productive Improving coordination of national fiscal from the business-cycle point of view, as it policies unnecessarily harms job creation and weakens The European Union, aware of the risks growth potential. Moreover, it impedes the associated with stagnation in the completion fulfilment of debt objectives. A counter- of the economic and monetary union, has cyclical logic also implies that criteria should begun to correct the system (Buti et al., 2018), be more resolutely met in times of expansion. but the efforts made must coincide with more substantial reforms. Thirdly, it is advisable to prioritize institutional development over a close First, a credible strategy for medium-term European follow-up of national fiscal policies, debt reduction is needed. By focusing mainly which is perceived as excessively intrusive vis- on short-term deficit reduction, the impact à-vis country preferences. It is indeed crucial of adjustment measures on future growth, that procedures conform with democratic tax bases and future deficits is not taken into institutions, which are ultimately responsible consideration. for the decision-making process and reflect the specific situation of each country. A different way of redefining objectives would be to include assets generated by To that end, the creation of independent public administrations. Investments in new fiscal institutions at the national level, or the technologies and other intangible assets, strengthening of those already existing, would financed though short-term deficits, foster be helpful. Such institutions could become productive potential and the ability to an important link within the European increase tax collection in the future. The coordination system. Tax and expenditure same can be said of public investment in policies evaluation is notoriously inadequate infrastructure. In certain countries, such as in most European countries. In the case of Italy, deficit containment has been achieved Spain, the creation of the Airef represents at the expense of the country’s infrastructure, an initial step in the right direction, which education system and scientific capital. A could inspire new initiatives. It is not just a

It is important that procedures conform with democratic institutions, “ which are ultimately responsible for the decision-making process and reflect the specific situation of each country. ”

24 Funcas SEFO Vol. 7, No. 5_September 2018 European fiscal policy: Situation and reform prospects question of guaranteeing an already existing The first of such options consists of creating administrative control of policies, but of an investment fund similar to the American functionally evaluating the implementation instrument. While there is a precedent (the of programs according to the set of EU objectives. Juncker Plan), this instrument is restricted to coordinating national investments, complemented by a modest European Finally, a greater symmetry in the treatment contribution through the European Investment of surplus and deficit countries would help Bank. Moreover, in principle, the Junker address the current deflationary bias and pro- Plan’s resources are allocated proportionally cyclical character of fiscal policies. Lacking to the economic weight of each country; a counter-cyclical European budget, the the unemployment rate or business-cycle responsibility of supporting economic growth environment are therefore overlooked in in a recession remains the responsibility of favour of geographical allocation, which is national governments, which, in practice, consistent with a policy lacking supranational means that it lies with those countries that orientation. have a greater budgetary margin. A more symmetric adjustment would be consistent A mechanism at the EU level would directly with debt criteria, insofar as surplus countries respond to the specific situation of each support investment and productive capital. country. In order to be acceptable for all partners, its criteria should: i) explicitly Creating a European fiscal stabilisation acknowledge that the fund is not intended instrument to aid a particular country, but rather any economy experiencing cyclical difficulties; The creation of a counter-cyclical management ii) impose conditionalities (reforms improving instrument at the European level would solve market functioning, industrial policies aimed many of the problems associated with the at enhancing the productive framework, etc.); current system. Such an instrument would be and, iii) prevent countries from cutting their able to directly confront asymmetric shocks, investment budgets (i.e., the replacement of thus complementing national fiscal policies. national policies by a European instrument, To be efficient, such a tool would need to be which would be interpreted as a subsidy). quickly activated and also be provided with sufficient financial resources (Claeys et al., A second option would be the creation of a 2016). In the United States, the American European fund to compliment national Investment Act was enforced from the unemployment insurance systems. The beginning of the crisis and played a decisive initiative would automatically activate when role in the recovery. Its available resources the unemployment rate exceeds a given amounted to approximately 5% of GDP, and threshold, such as 3 percentage points above were allocated over a three-year period. the average rate observed over a full business cycle. The main benefit of this method would There are several options in this regard, but be its prompt reaction to the business cycle, they all require a common fiscal capacity especially in comparison with the investment at the EU level, as well as the application of fund, which necessarily requires a relatively conditionalities to reduce moral hazard. [8] long gestation period to be operational.

The main benefit of a European unemployment insurance fund would “ be its prompt reaction to the business cycle, especially in comparison with the investment fund, which necessarily requires a relatively long gestation period to be operational. ”

25 A European unemployment fund contains Ultimately, funding determines the degree elements that would limit opportunistic of European responsiveness. Issuance of reactions by countries looking to cut social European debt securities is especially benefits in order to profit from EU aid attractive due to both its flexibility and the (moral hazard). It should be noted that a excellent rating of EU institutions. This rise in unemployment does not reflect well solution presents the additional benefit of not on national governments and cuts to social withdrawing resources from those countries benefits would certainly hurt their image even which most need them. more. Eurobonds, jointly guaranteed by European treasuries, would be used to finance the Another way of reducing moral hazard is European macroeconomic management to impose conditionalities. For instance, fund. Some countries are reluctant to countries that access the fund should be support the introduction of eurobonds given required to introduce certain labour market the risks associated with a new source of reforms. Part of the aid could even be debt. Moreover, they consider their current allocated to those programs which seem to credit rating as evidence of their rigorous be more efficient (i.e., strengthening of public management of public finances. If eurobonds employment services, the adoption of effective were issued, markets would reconsider their unemployed training methods, follow-up stance towards countries that balance of unemployed placement policies results their budgets without European aid. However, and of individual action plans). the battered finances of other countries would benefit from European support, especially in The fund’s main drawback is the anticipated recessionary periods. A way of avoiding such reluctance amongst those countries that risk is to insist that eurobonds issued during have reached or are close to achieving full a recession must be repaid by beneficiary employment. The fund could therefore be countries once economic conditions have designed to ensure that every country benefits improved. from it at some point in time. The 3% threshold proposed here meets such criterium. In order If the European anti-crisis fund is a to overcome this reluctance and appeal to complementary unemployment insurance their sense of European solidarity, the fund system, funding could come from countries’ could reserve aid for young people. This could social contributions. Since no eurobonds work in tandem with the Youth Guarantee would need to be issued, the system wouldn’t Program, which already relies on European negatively affect countries in good fiscal funding. health. Moreover, each country would have to make an additional effort during expansion periods in order to earn the right to Lastly, some experts advocate for a fund mobilize resources from the European system without specific spending criteria, which when they experience a sharp increase in could be used both to encourage investment, unemployment. complement revenues, foster the creation of enterprises or limit bankruptcy rates. Since Finally, the use of private financing is both it would be adaptable to the priorities of each possible and desirable if Europe introduces country, such a system would benefit from a a European investment fund. In fact, private high degree of flexibility. For instance, at the financing is a key feature of the Juncker Plan, beginning of the , the Finnish economy and it could increase both the volume and was severely impacted by a recession in share of national financing. Today, only a neighbouring Russia. However, the effects small proportion of resources come from the were concentrated in a single sector, which EU, and this amount can change depending required a specific treatment, consisting on the situation of each country. Currently, of a combination of restructuring, training there is a relative abundance of funds measures, and temporary subsidies to firms provided by the Juncker Plan in countries that had otherwise been profitable. enjoying high growth, whereas there are

26 Funcas SEFO Vol. 7, No. 5_September 2018 European fiscal policy: Situation and reform prospects

“ The task for Europe is to highlight tensions among different objectives and assess the impact on employment and convergence. ” scarce funds for those countries that most of a European minister of finance, who would need them and present the most profitable be accountable to the . investment opportunities. This situation Furthermore, European competencies could be avoided through the creation of the should be limited, especially regarding the European investment fund. management of the supranational fiscal mechanism and surveillance of national To the extent that differences in national macroeconomic balances. Governance legislations may cause unfair competition, a institutions of each country would still be certain degree of harmonization is required. responsible for the budget. In sum, the This is particularly true for business taxation. presence of a single currency entails a loss of Tax base differences, the treatment of royalties national sovereignty in exchange for greater and the complex network of tax reductions efficiency and solidarity. This is the critical lead to income transfers within business dilemma which Europeans and their leaders groups that eventually erode tax bases. This will have to address. situation is detrimental to the public finances of all states, but especially to those that have Notes established stricter criteria for equity between [1] An earlier version of this article was published individuals and entities and have tenaciously by the same author in ICE (2018), under fought tax evasion practices. the title “Política fiscal europea: situación y perspectivas de reforma”. The author wishes Moreover, EU policy could facilitate a real to thank Patricia Sánchez Juanino and Romain Charalambos for their help with compiling the convergence of economies. Some analysts exhibits for this article. believe reform incentives or technical support from the Commission is best. However, it is [2] See for instance the European Fiscal Board a complex matter since it interferes with the annual report (2017). priorities of each country. For instance, there is no single successful model of labour market [3] See IMF (2009), G20 London Declaration. reform. Recruiting and social protection can be initiated at the same time (Dutch [4] The specific value of the target is defined every model), or a government can prioritise three years (but always under the 1% limit), or flexibility (Anglo-Saxon model). The effects even at more frequent intervals depending on on income distribution are various, as the structural reforms adopted. are the consequences in terms of public expenditure. But empirical evidence shows [5] The EDP may also be activated when public that unemployment rates are similar in both debt exceeds 60% of GDP and in the absence of systems. The task for Europe is to highlight an adequate debt reduction plan. tensions among different objectives and [6] For a recent analysis of interactions between assess the impact on employment and fiscal policy and the financing of the economy by convergence. That said, it does not seem the ECB, see Jarociński, Marek and Maćkowiak, reasonable to impose a single model on Bartosz (2017). member states. [7] Such is the case of Spain (Torres and Fernández, Finally, the reform of European fiscal policy, 2018). as presented here and in other analyses, opens up issues of democratic control. Various [8] For a thorough discussion of all possible experts therefore propose the appointment options as well as of the interaction with system

27 incentives, see Bénassy-Quéré et al. (2018) and Torres, R. (2018), Política fiscal europea: situación the review by Bini Smaghi (2018). y perspectivas, Información Comercial Española, 903. References Begg, I. (2018), “Reform of the EU fiscal Torres, R., and M. J. Fernández (2018), “The framework,” Funcas Europe (forthcoming). Spanish economy: Scenarios for 2018-2020”, Funcas, Spanish Economic and Financial Outlook, Vol. 7, No 2, March. Bénassy-Quéré, A.; Brunnermeier, M.; Enderlein, H.; Farhi, E.; Fratzscher, M.; Fuest, C.; Gourinchas, P.-O.; Martin, P.; Pisani-Ferry, Wieser, T. (2018), Fiscal rules and the role of the J.; Rey, H.; Schnabel, I.; Véron, N.; Weder Commission, Bruegel. di Mauro, B., and J. Zettelmeyer (2018), “Reconciling risk sharing with market discipline: A Raymond Torres. Director for constructive approach to euro area reform,” CEPR Macroeconomic and International Analysis, Policy Insight, 91. Funcas

Berger, H.; Dell’Ariccia, G., and M. Obstfeld (2018), Revisiting the Economic Case for Fiscal Union in the Euro Area, IMF Research Department.

Bini, L. (2018), A stronger euro area through stronger institutions, https://voxeu.org/article/ stronger-euro-area-through-stronger-institutions

Bofinger, P. (2018), Euro area reform: No deal is better than a bad deal, VoxEU

Buti, M.; Giudice, G., and J. Leandro (2018), “Deepening EMU requires a coherent and well- sequenced package,” Voxeu, https://voxeu.org/ article/deepening-emu-requires-coherent-and- well-sequenced-package

Claeys, G.; Darvas, Z. M., and A. Leandro (2016), A proposal to revive the European fiscal framework, Bruegel Policy Contribution.

European Fiscal Board (2017), “Assessment of the prospective fiscal stance appropriate for the euro area,” June.

Fatás, A., and L. H. Summers (2017), The permanent effects of fiscal consolidations, Journal of International Economics.

IMF (2009), G20 London – Leaders’ Statement, 2 April 2009, www.imf.org/external/ np/sec/pr/2009/pdf/g20_040209.pdf

Jarociński, M., and B. Maćkowiak (2017), Monetary-fiscal interactions and the euro area’s vulnerability, ECB Research Bulletin, 36, https:// www.ecb.europa.eu/pub/economicresearch/ resbull/2017/html/ecb.rb170629.en.html

28 Funcas SEFO Vol. 7, No. 5_September 2018