Beyond the Juncker and Schäuble Visions of Euro-Area Governance

POLICYBRIEF ISSUE 6 | NOVEMBER 2017 BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

Guntram Wolff A EUROSYSTEM OF FISCAL POLICY Director, Bruegel Permanent, full-time Eurogroup president

Makes recommendations Initiates discussions European to euro-area ministers on on ﬁnancial assistance European member state ﬁscal policy, Euro-area Stability Commission based on reformed Mechanism and simple rules ministers managing Implements assistance programmes director

EU budget commissioner manages EU budget

Source: Bruegel.

THE ISSUE Two diametrically opposed visions of the euro-area architecture have been put forward. European Commission president Jean-Claude Juncker favours a model that puts the Com- mission at the centre of fiscal policy decision-making. The former German finance minister Wolfgang Schäuble argues that fiscal surveillance should be centred on a reformed Eu- ropean Stability Mechanism. Juncker’s proposal would over-emphasise the Commission when fiscal policy making is national and would unduly mix the roles of Commission and Council. Schäuble, by contrast, neglects the fact that national fiscal policy matters for the euro area not only for sustainability reasons but also because of the provisioning of public goods, stabilisation policy and effects on inflation and growth. This Policy Brief does not discuss the completion of banking union, which is essential for a stable euro area.

POLICY CHALLENGE Fiscal policy making in the euro area will remain a difficult balancing act between national politics and European interests. Departing from both Juncker’s and Schäuble’s proposals, the Eurogroup should be developed into a Eurosystem of fiscal policy (EFP) as the centre of euro-area fiscal governance. The Eurogroup should have a permanent, full-time president, with a mandate to represent the interests of the whole euro area, and who will report regularly to the European Parliament. The Commission would make fiscal policy recommendations to member states; fiscal rules would be reformed. Political, and in some cases market, pressure would increase on countries that fail to comply with recommendations. Ultimate responsibility for debt will remain national. The European Stability Mechanism should become a permanent fire brigade to manage sovereign debt crises, including possible restructurings in extreme cases. Finally, the EU budget should be reformed to focus on European public goods and on a stabilisation function. 2 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

COMPETING VISIONS OF EURO-AREA is built on a fine balance between GOVERNANCE: JUNCKER VERSUS community interests and national SCHÄUBLE 1. Juncker outlined his interests. At its core, this gives the vision in his 13 September European Commission president Jean- European Commission primacy in 2017 State of the Union Claude Juncker and Germany’s former initiating legislation and in issuing address to the European Parliament. See http:// finance minister Wolfgang Schäuble have recommendations in the context of the europa.eu/rapid/press-re- proposed competing visions of euro-area SGP, while giving member countries lease_SPEECH-17-3165_ governance. For Juncker, the core of the vi- supremacy in taking final decisions on en.htm. sion is a strengthened European Commis- the SGP, and giving the Council of the 2. In an undated non-paper sion, with a Commission vice president European Union and the European from the German federal who would be the euro-area finance min- Parliament the final say on legislation5. finance ministry, published ister, chairing the Eurogroup, presiding A merging of the roles of chair of the in October 2017; see over a euro-area budget that is part of the council and commissioner would upset https://www.scribd.com/ European budget and giving recommen- this fine balance. document/361120275/ German-finance-minis- dations to the Eurogroup and the member It would also lead to conflicts of try-non-paper-on-Euro- states on their national fiscal policies, interest. How could the European zone-reforms. based on a ‘political’ interpretation of the Commissioner/finance minister issue a 1 3. Though the Schäuble paper Stability and Growth Pact (SGP) . recommendation based on the EU legal is silent on what this would By contrast, Schäuble’s vision2 is framework, and then risk losing her/ mean for countries outside clearly motivated by a mistrust of the his authority as the chairperson of the the euro area, which are European Commission. Schäuble council that might want to take a political also currently subject to the proposes to transform the European decision to reject the recommendation6? S GP. Stability Mechanism into a permanent The European Commission already 4. It is comparable to European Monetary Fund (EMF) – the has an impossibly difficult task to appointing Wolfgang euro area needs a fire brigade even when interpret a set of rather incomprehensible Schäuble president of the Bundestag while keeping no fire is burning. According to this fiscal rules. But the political approach his finance minister plan, the EMF would have a clear crisis taken to SGP recommendations has position. prevention mandate comparable but undermined trust in the European

5. As was aptly described by more far-reaching than the International Commission as an independent guardian Italy’s former prime min- Monetary Fund’s Article IV. In particular, of the treaty and has disturbed the ister Giuliano Amato at an the ESM would “gradually” be put delicate EU balance described above7. October 2017 conference; in charge of monitoring the SGP3. Flexibility in fiscal rules is useful but see https://www.eu2017. Eventually, the Fiscal Compact and needs to be deployed in a broad forum ee/political-meetings/academic-conference (min- ESM Treaty would be changed so the with strong support from the member utes 26ff; Amato, 2017). ESM would fully monitor euro-area states, and should be applied even- compliance with fiscal rules. Schäuble’s handedly. Juncker’s European finance 6. Some have made a comparison with the high mistrust of the European Commission is minister proposal is also inefficient representative for foreign expressed in the wording that the ESM because it would give the position of affairs, who is also the vice would play a “stronger, neutral” role. chair of the Eurogroup to the European president of the European These visions of the euro-area Commission, disregarding the fact that Commission, but the high architecture are diametrically opposed fiscal policy is national and legitimacy representative position is in fact a double-hat – and both are flawed. Juncker’s for national fiscal policy derives position and not a role in proposal ignores the reality of the strong from national parliaments. Having which only a commissioner intergovernmental nature of European a commissioner, whose legitimacy acquires the chairmanship fiscal policy coordination, while Schäuble is based on European processes, as of the Eurogroup. Also disregards the numerous spillovers from chair of the group of national finance substantively, the EU’s European fiscal policymaking. ministers would not provide adequate Common Foreign and Security Policy does not Juncker’s plan to merge the role political legitimacy and the efficiency foresee a clear institutional of the chair of the Eurogroup with of the group would suffer as national separation between the that of the economic and financial ownership would decline. Having said issuing of recommenda- affairs commissioner is institutionally this, it is true that Eurogroup decisions tions based on a clear legal problematic. In fact, the proposal would should be made more transparent. framework and decisions that need to be taken in amount to asking the prosecutor to Schäuble’s intergovernmental vision the council based on such preside as the chief judge over fiscal also has major shortcomings, and recommendations. decision making4. The European Union some parts of his proposal, such as 3 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

automatic restructuring, would be highly the Schäuble paper beyond emergency problematic. lending and strengthening of banking According to Schäuble, the ESM union. should remain an intergovernmental institution (at least if there is no will TOWARDS A MORE EFFECTIVE to change the treaties). Nevertheless, INSTITUTIONAL SET-UP: A the proposal is worrying institutionally ‘EUROSYSTEM OF FISCAL POLICY’8 because it would unsettle the delicate Neither Juncker’s nor Schäuble’s visions balance between interests of the would deliver effective decision mak- euro area as a whole and national ing. But they are right to highlight that interests. In particular, the ESM as an the current set-up suffers from draw- intergovernmental institution cannot backs and should therefore be changed. make ‘neutral’ recommendations – on Currently, fiscal coordination primarily the contrary, it is a highly political focuses on sustainability or more specif- institution. As its decision-making ically the avoidance of excessive deficits. process is based on unanimity among its But two important aspects are not suffi- Board of Governors, it would essentially ciently considered in the current system: have to fully internalise the political (1) The framework for management of process when issuing fiscal policy sovereign debt crisis, including possible recommendations. In doing so, the debt restructurings in extreme cases, is role of the neutral interpreter – ie the weak and (2) the representation of com- prosecutor – and the judge would again mon interests in decision-making is weak be blurred. while fiscal rules do not sufficiently take The proposal would deprive the care of stabilisation policy, in particular Commission of its role as the institution in terms of the area-wide fiscal stance. in charge of applying the fiscal rules (at National fiscal policies matter for the least for the euro-area countries). The union beyond sustainability concerns: important separation between political in particular, the area-wide fiscal interpretation and neutral application of stance and its impact on inflation, and the rules would be lost. spillovers of national policies across The ESM itself also has interests that borders, are relevant channels that might not be in line with the interests of need to be considered9. In the absence the euro area as a whole. In particular, of a large central/federal treasury, it is it could take an excessively risk-averse indispensable to have a forum in which 7. Representatives of smaller approach to fiscal deficits, neglecting national policies can be discussed countries have voiced con- the positive economic effects that good and, ideally, adapted if necessary. cerns that they cannot rely on the Commission to take stabilisation policy can deliver, while Coordination of fiscal policies will remain an even-handed approach focussing excessively on sustainability important in Europe’s monetary union between smaller and larger concerns, which are the primary interest unless a giant leap towards a federation member states. This can of the ESM. with central fiscal powers is made. Since have negative effects well The proposal would therefore national fiscal policy is driven by national beyond the application of the SGP. How can the Com- deprive the Eurogroup of the important policymakers, a forum needs to exist mission ask member states representation of euro-area-wide where these national politics can be to respect the rule of law interests in its decision making. Beyond reconciled. when it itself appears ready ensuring that national fiscal policy Of course, one could hope to create to interpret the SGP rules remains sustainable, community a system in which national fiscal policy differently for different interests would be little represented. is exercised fully independently and a countries? However, it is well known and well hard no-bail-out clause prevents moral 8. The paper does not discuss established that there are numerous hazard. However, such a system is only the completion of banking spillovers and interactions between credible with significant European-level union, which is essential for a stable euro area, nor national fiscal policies, monetary policy, policies (in particular banking union) next steps on capital mar- inflation and euro-area growth. and only efficient with European-level kets union. It is indispensable that euro-area stabilisation policy. The latter seems

9. For a recent paper see interests should be strongly represented unlikely to be available anytime soon while Farhi and Werning (2017). in the Eurogroup. That is not visible in the former is being built-up. Coordination 4 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

policies will therefore remain important status if the European Parliament were to for stabilisation. When banking union play a role in the appointment process. is completed and financial policies are To increase transparency around truly European, the no-bail-out clause decisions taken, the Eurogroup president President of the will become more credible. That also would have to regularly report to the Eurogroup should means that fiscal rules can become less European Parliament, perhaps back- be a permanent, full intrusive. At the same time, to achieve to-back with the appearance of the time position; it has better stabilisation policy, the rules should European Central Bank president. been argued that it become more binding politically as the However, the European Parliament is not a full-time job, following sections explain. should not have the right to dismiss the but this view seems Eurogroup president; that right would to disregard the STRENGTHEN THE ROLE OF THE EUROGROUP remain with the Eurogroup to reflect the complexity of the PRESIDENT BY MAKING IT A FULL-TIME fact that the ultimate ‘judges’ on national task POSITION AND IMPROVE ACCOUNTABILITY fiscal policies remain in the council. An obvious starting point to better After all, national fiscal policies are not represent euro-area interests is to decided in the European Parliament. transform the president of the Eurogroup A further step towards increasing the into a permanent, full time position10. common interest in the decision making It is sometimes argued that chairing on national fiscal policies would be to the Eurogroup is not a full-time job, give the president of the Eurogroup a but this view seems to disregard the certain voting weight in formal Economic complexity of the task. Key decisions need and Financial Affairs Council (ECOFIN) to be prepared through many bilateral decision making. Of course, to merge the discussions between key stakeholders role of the Eurogroup president with the before the meeting11. Moreover, a full- ECOFIN chair or to give voting weight time president should also increasingly would require a treaty change. represent the euro area’s interests. For example, the Eurogroup president could THE EUROPEAN COMMISSION AND THE regularly visit national parliaments and FISCAL RULES give press conferences in Brussels and in The Commission should continue to be the national contexts to explain Eurogroup in charge of fiscal surveillance and give decisions. In fact, it is very important to neutral recommendations to the Euro- make the European voice heard in the group. However, fiscal rules are in urgent national decision-making bodies so that need of reform. They are overly complex, collective decisions do not only rely on the opaque and often provide faulty recom- national finance minister in the national mendations in real time. Moreover, Eu- contexts. A further advantage of a full- ropean fiscal rules do not give sufficient time position is that conflicting interests weight to the stabilisation policies need- between the national and the European ed for the monetary union as a whole. mandate would disappear. In addition, while rules such as the To underpin a neutral president who Fiscal Compact put significant weight on chairs and represents the euro-area debt reduction, in their application the interest while simultaneously being debt reduction is not achieved. Too many fully accepted by national ministers, loopholes and unclear interpretations

10. For the last months of his a dual appointment process would prevent transparent and clear decision mandate, Jeroen Dijsel- be desirable. The appointment could making that makes economic and bloom has become such a be based on a qualified majority vote political sense. full-time Eurogroup chair. in the Eurogroup followed by a (non- Instead, a simple ‘Taylor rule’ for 11. As Eurogroup insiders binding) confirmation vote in the deficits should be put in place to provide know, one of the reasons European Parliament (possibly in transparent guidance to national why Eurogroup meetings euro-area composition). An important policymakers: Deficits should be higher as are now less less likely to legal question would be whether the the output gap increases (and conversely). last into the night is that more preparatory work is Eurogroup, which is currently officially Deficits should be lower, the larger the done by the current Euro- still an informal body according to the debt level is compared to the 60 percent group president. Treaties, would need a different formal SGP benchmark. The weights attached 5 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

to stabilisation and debt would need to before the European Parliament. be agreed and fixed. Finally, to prevent liquidity traps when the nominal interest WHAT ABOUT THE ESM? rate is close to zero, all countries should The ESM is of vital importance for the euro run higher deficits than what the Taylor area’s stability. It is therefore important rule suggests. An alternative proposal to think about how to strengthen it worthwhile considering is an expenditure institutionally and how to embed it in the rule, see for example Claeys et al (2016). euro-area governance framework proposed A simple rule can be translated here. into a simple formula and would lead The ESM manages sovereign debt to greater transparency and even- crises and prevents self-fulfilling crisis in handedness in fiscal recommendations. sovereign debt markets together with the It would lead to sensible ECB’s Outright Monetary Transactions recommendations that take account of programme (OMT)12. An automatic each country’s sustainability concerns, restructuring clause that forces debt stabilisation needs and the need to restructuring in all circumstances in support monetary policy when it is at which the ESM is employed would the zero lower bound. destroy this important feature that is The Commission would compute the of vital importance for the euro area. deficit suggested by the rule and make In fact, the existence of the ESM/OMT a recommendation to the Eurogroup on programme is an essential substitute for a how much of the gap between the actual euro-area safe asset because it solves the deficit and the one given by the simple problem of self-fulfilling debt crises. formula should be closed by the next Without a strong ESM/OMT year’s budget. programme, the euro area would need to The Eurogroup, in turn, would create a treasury to issue a common debt make a political assessment in order to be sustainable. However, such based on the neutral Commission a step would require a huge leap forward numbers. In particular, it would give in terms of political and institutional a recommendation on the fiscal convergence, which the euro area will adjustment member states should not be able to make at this stage. More undertake. If countries do not comply technical solutions such as European with the recommendation, politically Safe Bonds (ESBies)13 may be desirable pressure would gradually build-up. but do not seem to convince either In particular, it would be the role of market participants or policymakers. the permanent chair to explain in the Therefore the ESM/OMT programme national context why a decision was needs to be made permanent. The most taken. Decisions would thus become important feature of the ESM/OMT increasingly binding on national programme is a political agreement on the policymaking by an intensification of sustainability of debt, permitting to the 12. Claeys (2017) empha- political pressure on the country. In ECB to play fully its lender-of-last-resort sises that the reformed extremis, access to ESM lending could function. One important step to make the ESM should also have be withdrawn by the Eurogroup by a ESM/OMT programme more credible for mechanisms to deal with supermajority vote, adding market the markets, and legally sounder, would pure multiple equilibria/ liquidity problems without pressure on top of political pressure. be to accept that the ESM should take any need to resort to condi- The European Commission would losses first in case debt turns out to be tionality. thus become a less political body than unsustainable ex-post14. This would be a

13. The main justification for currently, and would interpret a simple significant step in the direction of creating the ESBies in Brunnermei- set of rules in a transparent way. It would a fiscal union for the euro area. er et al (2016) is exactly be for the Eurogroup as the political Managing a sovereign debt crisis is the problem of multiple judge to decide on deviations from the about managing the distribution of the equilibria in sovereign simple rule. Transparency about why adjustment burden – a highly political bond markets. deviations from the rule were allowed issue that in the euro area involves 14. For a detailed discussion, would be significantly improved through national and European decision makers. see Wolff (2014). the appearances of the Eurogroup chair Once the multiple equilibria problem is 6 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

solved, with the ECB being the lender of managing director of the ESM could be last resort, states cannot go bust unless confirmed by the European Parliament, they choose to do so. Unlike companies, following the appointment by the they have – even when they are in great Eurogroup ministers. The managing difficulties – revenues (ie tax resources) director would regularly testify to the that vastly exceed their interest payment parliament. And while she would not obligations. Moreover, many potential have voting rights in the Eurogroup, her tax resources remain unexploited, for role could be strengthened by giving example taxes on wealth15. Nevertheless, her the right to initiate discussions debt restructuring might be necessary on assistance programmes based in certain circumstances if debt is on an independent analysis of ESM assessed to be unsustainable, ie if raising staff. Unnecessary delays in financial new taxes or cutting spending would assistance programmes caused by lead to a highly negative situation for national procrastination could thereby the country concerned. One option be prevented. The ESM would have the that could be explored would be more obligation to clearly describe alternative equity-like instruments such as GDP- options to the Eurogroup, and it would linked bonds. They could provide some execute decisions taken by the Eurogroup 15. Aussilloux et al (2017) desirable automatic adjustment capacity under the political leadership of the usefully remind us that many tax resources such as while also increasing market discipline permanent Eurogroup chair. Finally, property taxation remain on the margin. However, there are also it would be in charge of defining and unexploited in European important questions as to whether such overseeing conditionality. societies in a context in a small market is liquid and whether it which public debt has often would create negative spill-overs on the WHAT ABOUT A EUROPEAN FINANCE increased substantially main stock of debt making it thereby an MINISTER? while private wealth has equally surged. undesirable instrument. French president Emmanuel Macron’s The main point here is that sovereign proposal for a European finance minister 16. Whether or not to rename 19 the institution the EMF is debt crises will always be highly is, so far, not concrete . Juncker’s idea of secondary importance. political. The question then is who to call its vice president the ‘European Most important is to make should decide on the distribution of finance minister’ and give her a ‘line’ in it a permanent institution the adjustment burden. In a monetary the EU budget might be too small to war- and to expand its functions union, this decision cannot be taken rant that title. A finance minister should so it can serve as a back- by national decision makers alone, be in charge of a substantial budget with, stop to banking union. One possible legal avenue could nor can it be taken centrally. Instead ideally, taxation and spending powers and be Article 352 of the Treaty responsibility for the decision will be the capacity to borrow. For the euro area, on the Functioning of the and should be with the ESM and the this would require treaty changes and a EU. At the time of writing, euro-area ministers. The question is huge step forward in terms of political European Commission what institutional rules should apply to convergence. It is therefore probably only proposals on the ESM are due. the decision making. a long-term vision. Sapir and Schoenmaker (2017) It makes sense to develop the EU 17. The German constitutional suggest making the ESM16 a permanent budget further. The Commission’s idea court, however, does not allow a supermajority vote institution in charge of crisis to create the euro-area budget as part where Germany could be management (for governments and as of the EU budget is sensible. First, it outvoted as this would vio- a backstop to banking union). They also would avoid creating new institutions late German constitutional suggest changing its voting mechanism that would drive a political wedge requirements, see Calliess allowing for supermajority voting17 – a between euro-area and non-euro area (2012). wise proposal. Moving to supermajority countries19. Second, serious reform of 18. See, for example Macron’s voting (eg an 85 percent threshold) the EU budget is in any case needed. speech at the Sorbonne would be an important step to increase President Macron’s Sorbonne speech on 26 September 2017 the reliability of the ESM as a crisis- (Macron, 2017) identifies good priorities (Macron, 2017). management instrument. for joint action with true European 19. Still, non-euro area coun- But one could go further in increasing value-added, which would also have the tries should not be liable to pay into the euro-area transparency and strengthening the support of many citizens in Europe. In budget line of the EU European interest in such decisions. particular, the costs of border control budget. In particular, the appointment of the and joint investments in climate change 7 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

mitigation could be increasingly financed such as a large fall in GDP. by the EU budget. The EU budget could Such insurance is more important for also increasingly fund European-level weaker than for stronger countries. Strong research, joint universities, exchange countries are more able to borrow and programmes and collaboration in insure themselves in the markets than A reform of the EU defence and security. Structural funds weaker countries that are more at risk of budget would also should continue to support convergence, losing market access while still engaging permit the creation but in particular in regions in significant in sensible macroeconomic stabilisation of a stabilisation need when the national level faces strong policy. As desirable as insurance is for the instrument; budget limitations on the support it functioning of a monetary union, it is this this would not can provide. A reform of the European asymmetry that makes the introduction of replace national common agricultural policy could free up insurance in the euro area so difficult. stabilisation policies significant resources , but some increases Politically, it might therefore be easier but would support in contributions may be necessary the not to differentiate between a fund for countries with more one wants to truly take care of stabilisation policy and spending for relatively little fiscal European public goods. European public goods. One could, space A reform of the EU budget would also for example, create more contingent permit the creation of a stabilisation budget lines that would allow spending instrument. While such an instrument more in specific countries when they would not replace national stabilisation are hit by shocks, such as an increase in policies, it would support countries with immigration22. relatively little fiscal space. One option One significant step further towards would be to use part of the seven year EU creating meaningful EU-level fiscal budget framework as a fund that could capacity would be to introduce an EU be deployed in countries faced with a tax to fund the EU budget and create a shock. For example, a fund amounting to borrowing capacity in the EU budget. For €50-70 billion would enable significant example, if one based the EU budget on support to be provided to a specific a rather volatile tax, such as a corporate country if it was strongly affected by an tax, then the EU budget itself would asymmetric shock. The support could become a stabilising factor. One could amount to 1-2 percent of GDP of the also consider a carbon tax, which could country concerned20. As recessions be raised already under the current EU happen on average every seven years, treaties. This would be a step towards such a provision, amounting to about 10 a true centralisation of stabilisation to 15 percent of the EU budget, would policy funded with own resources and 20. For example, it could be a helpful instrument. However, it combined with a borrowing capacity. amount to €32bn over two should be clear that such a fund would Such a ‘federalisation’ of stabilisation years for a country the size not play a significant role in area-wide policy would improve the working of the of Italy. macroeconomic stabilisation policy. It euro area but it is politically, legally and 21. In a simulation exercise, would be insurance to support specific institutionally difficult to do. Claeys et al (2017), show countries hit by severe shocks. The EU budget commissioner that a system built around a European unemployment It would be important to define the manages meaningful resources and a insurance scheme for conditions under which such support reorientation of the EU budget could large shocks would have payments would be made. The idea of provide meaningful insurance that would required net payments creating a catastrophic unemployment be helpful in specific circumstances. This of some €50 billion in reinsurance scheme has the advantage of budget commissioner would not stand 2009, when the shock was enabling automatic payments based on a above national ministers in that she would greatest. clear indicator. However, it raises serious not have the resources to replace national 22. The more the budget lines political concerns that the countries borrowing or national spending. National of the EU budget become contingent, the more that would most need support are those fiscal policies will remain the core of flexibility and the greater that have failed to reform their labour fiscal policies in the euro area. The budget the budget with which one markets21. An alternative would be to have commissioner would also not have the could arrange payments an instrument linked to clear conditions in power to overrule national decisions, a to countries and regions terms of structural reform. A third option political power that would remain with the in need. would be to link it to an objective trigger, Eurogroup. This is why she would not be a 8 POLICY BRIEF BEYOND THE JUNCKER AND SCHÄUBLE VISIONS OF EURO-AREA GOVERNANCE

23. See Sapir and Wolff (2015) euro area finance minister. Yet, she should matter. In this proposal, the Eurogroup for an earlier discussion participate in the Eurogroup. would be transformed into a Eurosystem with a somewhat different This institutional set-up could be of fiscal policy and remain at the centre set-up. called a ‘Eurosystem of fiscal policy’23. It of joint fiscal policy decision-making would be a Eurogroup with significant in the euro area. The proposal here modifications to strengthen the euro- outlined would not remove the tensions area-wide interest. At the top would between national and euro-area wide be a powerful Eurogroup chair, who interests in fiscal decision making. would also be the voice representing These are inherent to the decentralised the euro-area interests in national and organisation of fiscal policies in the international forums. She would not be euro area. Yet, the proposal would help a national minster and ideally would manage these tensions and strengthen have voting rights. The Commissioner in the debate the voice of the centre with for economic and financial affairs and the creation of permanent positions, the ESM managing directors would be new rights of initiative (and possibly participants without voting rights. As votes) and greater accountability to the today, the Commission would have the European Parliament. The Eurosystem right of initiative and the obligation to of fiscal policy would thus be the centre make recommendations on fiscal policy. of coordination where difficult trade- In addition, the ESM managing director offs between national and European would be given the right to initiate interests are negotiated and coordinated. discussions on ESM programmes. If Reformed fiscal rules would provide the euro area were to decide to create transparent guidance focussing not only additional fiscal capacities, the EU budget on sustainability but also area-wide commissioner would be an additional stabilisation. The EU budget would member of the group. In the long term, become more useful for providing public the positions of budget commissioner and goods and supporting stabilisation. ESM managing director could be merged, Nevertheless, fiscal policymaking will especially if the ESM became a full EU remain a delicate political balancing institution and the resources of the ESM act, which is unavoidable unless Europe became true European resources. decides to become a federation. Institutional set-up and governance

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