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POLITICA ED ECONOMIA DELLA UE:
VERSO UN’UNIONE FISCALE?
MASSIMO BORDIGNON
UNIVERSITÀ CATTOLICA DI MILANO
PROLUSIONE ALLA PRIMA EDIZIONE DEL
MASTER IN ECONOMIA PUBBLICA
SCUOLA SUPERIORE DELL’ECONOMIA E DELLE FINANZE
«EZIO VANONI»
MILANO, MARZO 2012
Plan of the talk


Overview
Three facts:

Economics
Legitimacy
Federations

The EMU/ EU in face of the crisis



Governance
Policies

Ways out

Overview
The EMU (and consequently the EU) faces a severe
crisis
 This crisis is mainly institutional-political rather
than economical
poor governance and weak legitimacy;
EMU countries have taken some important steps to
address the crisis, but these are not enough to
provide a long term workable solution;

Overview
The experience of other federations - successful
monetary unions suggests that reforms to increase
democratic legitimacy and strengthen federal
structures are needed;
Not a fully fledged Federal State, but a more
thorough FISCAL UNION across EMU countries, with
some amount of federal resources and
supranational (not just intergovernmental)
governance.
Overview



A Fiscal Union might imply some amount of
stabilization transfers but does not need to be a
transfer union; many existing federal countries are
not;
Creating a Fiscal Union across Euro countries will
need a revision of the Treaties and likely a two tier
Europe; sharing a currency it is not the same as
sharing a market;
The medium term alternative may be a breaking up
of the Euro area (and then perhaps of the EU) for
political more than economic reasons.
Fact 1. EMU/EU has not lived up to its
promises on economic grounds…



Macro-economic indicators (GDP growth, productivity,
employment, inflation..) have not been on average
better in the EMU zone than in comparable areas in
or outside Europe;
Intra- EMU trade has not increased as expected
(+15% rather than +50%), even because progress in
common market integration has halted;
Benefits from Euro have been unevenly distributed,
with increasing divergence across countries (e.g.
McKinsey, 2011: benefits= 3.6% Euro GDP; half to
Germany)
Fig. 1 Average rate of growth in GDP (1999-2012)
Fig. 3 Average rate of growth in per capita GDP euro countries (1999-2010)
Fact 1. EMU/EU has not lived up to its
promises on economic grounds…



Financial integration has deepened, but the process is
now quickly reversing leading to segmentation of
national financial markets, due to insufficient
regulation at federal level
no effect of either SGP or Lisbon Agenda on EU
countries performance (Ioannu & Stracca (2011));
Behind this dismal performance, a basic governance
problem: not enough surrender of national
sovereignty either for sanctions (SGP) or for common
policies (LA). “You scratch my back and I will scratch
yours” policy…
Fact 1. EMU/EU has not lived up to its
promises on economic grounds…


Still the Euro area is in better shape (both internally:
public finance and externally: current account) than
many other federations.
There is not a problem of insufficient saving, but that
saving in the North is no longer willing to finance the
deficits of the South.
Interest rates on government bonds 10 years duration
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
Germania
Francia
Malta
Slovenia
Irlanda
Italia
Olanda
Slovacchia
Grecia
Cipro
Austra
Finlandia
Spagna
Lussemburgo
Portogallo
1
g1
lu
10
ot
t-
0
ge
n1
-0
9
ap
r
8
lu
g0
07
ot
t-
7
ge
n0
-0
6
ap
r
5
g0
lu
04
ot
t-
4
ge
n0
-0
3
ap
r
2
g0
lu
01
ot
t-
ge
n0
1
0.00
Unitary costs for labor (1998=100)
150
140
130
120
110
100
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
90
Germania
Irlanda
Grecia
Spagna
Italia
Portogallo
Debt and deficit (% GDP, 2011)
Source: Japan, UK, Usa and Canada OECD Economic Outlook No. 90;
EU 27 and Eu17, Eurostat and data refer to 2010
Fact 2. EMU/EU is losing popular
support…



Euro barometer data show a declining support for EU
(only 50% thinks EU membership a good thing for
her/his country…) and EURO (53% in favor..)
But support for EURO larger than support for EU, and
this is still true both in Germany (63% in favor) and in
Greece (71%), although declining in many countries
in the last six months of 2011;
EU elections are “second order” (not on EU issues),
with falling turnout. Only the elite (i.e. highly skilled
voters) bother to vote.
Support for euro
Support for euro, the trend in 2011
Turnout at the European Elections
(1979 – 2009)
Fact 2. EMU/EU is losing..



Is this worrying?
Majone-Moravesik: no. The EU is a technocratic
structure, implementing Pareto improving reforms,
with enough separation of powers. Democracy
damaging. Hix-Follesdal: yes. Not enough political
debate and EU policy produces winners and losers.
Whatever we believe about the past, former position
clearly wrong for future Euro countries. With “euro
plus” common policy on sensitive political issues
(taxes, labor, pensions..), not technocratic problems.
Fact 3. What can we learn from other
federations?



Often said EU is not optimal “federation” and EMU
is not OCA. But existing federations were not born as
they are now. Federal structures emerged as a result
of crises, conflicts, wars…(Bordo et als., 2011). E.g.
The US.
The current EU/EURO crisis is also an opportunity for
institutional change.
Large variance across federations, but two general
lessons:
Fact 3. What can we learn from other
federations?


Some forms of federal stabilization policy is implicit
in any successful monetary union to cope with
asymmetric regional shocks.
Even in the US and in spite of labor mobility, flexible
labor markets and financial integration, fed budget
insures between 20-40% (depending on estimates)
of regional shocks. This go through automatic
stabilizers (i.e. federal income tax) and explicit
transfers to support local government programs (inter
state transfer= 2.3% GDP).
Fact 3. What can we learn from other
federations?



But stabilization does not necessarily implies
redistribution in the sense of permanent transfers to
poor regions/states (e.g. Transfer Union).
The US, Brazil, Argentina are not redistributive
federations; Canada, Germany, Spain are (Rodden,
2010);
This depends on the political-institutional structure;
presidential and bicameral system with strong
regional upper chamber less conductive to equalizing
transfers.
The EMU/EU and the crisis: governance



“..we badly missed a governance structure since the
launching of the Euro” H. Van Rompuy to the EP,
February 2012
Lisbon Treaty: a dual decision method (Fabbrini,
2011). Supranational (EP, EC, Council) for single
market policies; intergovernmental (European
Council, Council) for EMU and other sensible policies
(i.e. defense).
The EMU crisis has been managed by countries, i.e.
the German-France directory, with little or no role for
federal structures such as EC and the EP.
The EMU/EU and the crisis: governance



This has led to delays in facing the crisis, resentment
in other countries, endless bargaining, short termism in
decisions as national political leaders answered to
their own national electorate.
The resulting uncertainty has deepened the crisis and
made the solutions still unsatisfactory.
Also, for constitutional and political reason, the ECB
could not work fully as a lender of last resort (it did
it only indirectly, through refinancing of the banking
system and limited purchase of sovereign bonds).
The EMU/EU and the crisis: policies
The European semester (coordination of fiscal policy)
 Six Packs (Strengthening of SGP; reverse majority,
greater role to Commission, even on macro-economic
imbalances)
 Euro-plus pact (23) (political commitment on
harmonizing policies (tax, pension, labor etc); peer
review)
 Fiscal compact (2013; 26) B. Budget rules
constitutionally enforced, debt brakes;
 ESM (2013) to take the place of EFSF, permanent
system to support illiquid but solvent Euro countries.
The EMU/EU policies: assessment



On the plus side: increased coordination of national
policies, not only fiscal, strengthening of fiscal
surveillance; .. But..
Euro-plus just a political commitment, not truly
surrender of sovereignty by countries, same limitation
than Lisbon agenda;
Balanced budget rules make national fiscal policies
strongly pro-cyclical (more than in the US, where BBR
are “golden rules”); but differently from the US,
without a federal budget, who will take care of
asymmetric shocks?
The EMU/EU policies: assessment


ESM is a last resort measure, not a short term
stabilization mechanism; it resembles bankruptcy
rules for local governments existing in many
federations (loss of sovereignty and debt
restructuring in exchange of money), but with two
important differences:
ESM still managed by countries, almost with unanimity
rule (Germany veto player in all circumstances); in
other federations it is the federal gov, with federal
money, that takes care of local govs financial
problems;
The EMU/EU policies: assessment


Legitimacy problem; policies to be implemented at
national level in countries receiving funds from ESM
decided by technical bodies (EC, IMF, ECB), not by a
federal parliament where interests of the receiving
countries are represented.
National public opinions may rebel.
Ways out



Short term
Situation very fragile.. Any random episode may still
trigger a financial crisis..
Increase federal regulation of the banking sector to
avoid further segmentation -perhaps current crisis is a
banking, not a balance of payment, crisis (Shin,
2012)
Hope that in spite of the Fiscal Compact, countries in
better shape keep up aggregate demand.. the EC
can play a role stressing fiscal interdependence..
Ways out
Longer term.
Two speed Europe probably unavoidable; as euro
countries further integrate, frictions with no euro
countries bound to increase. To cope with the crisis
Euro countries are already creating their own
institutions (Euro summit) and treaties (Euro plus,
Fiscal Compact).
Better recognize it and revise the European treaties
accordingly. Not sure existing Enhanced Cooperation
Agreements enough to accommodate the needs of
the Euro area.
Ways out
The legitimacy problem: several proposals. Merging
the figure of the President of Europe with the
President of the Commission and having it elected in
pan-European elections (Berglof et, 2003; Hix,
2008) a possibility.
Better a Presidential system to avoid the pitfalls of
transfer union.
An elected President would revive citizens interest in
the EU and ignite a political dynamics leading to a
strengthening of the European government vis a vis the
member states.
Ways out


Following the direct election of President, introduce
a Fiscal minister for the Euro area, accountable to
both EP and the Council (Sapir et als, 2011), and in
charge of the ESM;
The fiscal minister could act faster and because of
increased legitimacy could be given more intrusive
powers on national governments (veto power on
budget), addressing the moral hazard problem;
But crucial that the Fiscal minister can rely on own
sources (a EU tax base: common corporate income
tax base? Carbon tax? Tobin Tax? Seigniorage?).
Ways out



The ESM should also be financed by accumulated
payments by states more likely to use the ESM as
originally proposed by Gros-Meyer (2010).
In the medium run EU Budget not large enough to
play a stabilization role; but the ESM under the new
rules could help by providing temporary transfers to
countries hit by asymmetric shock. Also needs a more
flexible use on cohesion and structural funds.
Fiscal compact will imply less room for investment
at the national level; hence, a larger role must be
played by the EU budget.
Ways out



The EU Budget could be divided in redistributive
issues, financed by contributions from the states and
EU public goods, (research, transport, energy)
financed by own EU resources (Micossi, Salvemini,
2010).
This part of the budget should be used to finance
large European infrastructure projects (e.g. Ten-T, TenE), directly or in PPP. Issues of EU bonds?
A stronger Agenda for growth is also what
Europeans seem to be asking…
What if we don’t do any of these?


Status quo scenario. Mckinsey (2011): 2011-16,
Eurozone GDP annual growth 0,6%, unemployment
11,5%, debt in core countries 89% of GDP, GIIPS
113%.
Can the euro area survive such a scenario?