July 16, 2020, 19:31

EU Ramps Up Calls for Common Budget to Stabilise Economic Growth

EU Ramps Up Calls for Common Budget to Stabilise Economic Growth

A top EU official is urging to advance the creation of a single budget area within the bloc, saying that common fiscal policies could equalise the pace of economic growth and development between EU member states and stave off the mounting risks to macroeconomic stability.

Kristian Rouz – EU Commissioner for Economic and Financial Affairs Pierre Moscovici is urging Eurozone members to intensify efforts to establish a single budget, saying centralised fiscal policies would allow absorbing future shocks to the bloc’s economy and prevent structural discrepancies in GDP growth between member states. 

Moscovici’s remarks come as the Eurozone is facing a slowdown in economic growth this year, with some economists warning that the bloc could dip into a recession in case of a full-scale trade standoff with the US.

“This is the first step, a foot in the door”, Moscovici said on the side-lines of the International Monetary Fund (IMF) and World Bank meetings in Washington. “We need an instrument that is also capable of addressing asymmetric shocks, to create convergence and that can also have a stabilisation function”. 

Moscovici suggested the single budget could be set up as a policy framework to coordinate the levels of taxation and spending across the European finance ministries. Subsequently, the Eurozone – or even the EU – could establish its own budget authority, which would set a fiscal framework for all member states. 

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The common budget could at first be a “budgetary instrument for convergence and competitiveness for the euro area”, Moscovici said, with deeper fiscal integration to follow.  

Last year, French President Emmanuel Macron made practical proposals to advance European integration by establishing a single budget, which would be the next step after the creation of the European Central Bank (ECB) back in 1998 allowed the establishment of a single monetary policy framework across the majority of EU member states. 

In December, Macron’s proposals were endorsed by German Chancellor Angela Merkel and several other EU leaders. However, some Northern European countries are still opposed to the idea – citing the difference between their tight fiscal frameworks, and the traditionally loose budget policies across the nations of Southern Europe.

Some experts say countries such as Spain, Italy, and Greece have been reliant on elevated levels of budget spending to support economic growth for decades. Meanwhile, Northern European nations have traditionally relied on foreign trade as the main source of growth, while keeping taxes high, and spending low. 

The concern is that this difference in approach to fiscal policies could produce tensions within the future single budget area.

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However, Moscovici says the EU has no choice but to advance integration in the face of mounting risks in the global economy. He believes a single budget would level the playing field for private-sector companies within the EU, while allocating public sector investment where it needs to be regardless of national borders. 

“We are discussing a slowdown, downside risks, a possible next crisis, we are seeing that all our countries struggle with inequalities, that there is a rise of nationalism – we cannot wait for five more years”, Moscovici said. “I am quite sure that the economic, social and political circumstances will lead us back to this greater ambition sooner rather than later”.

The debate of a single budget comes as several Southern European nations, mainly, Greece, still owe almost 300 bln euros to Northern European – primarily German – lenders. Between the European debt crisis of 2011 and the Greek fiscal meltdown of 2015, the German public has been predominantly opposed to bailouts and loans provided by Berlin to countries such as Portugal, Italy, and Greece.

In this light, some fear Southern European nations could abuse the single European budget to reach their development goals at the expense of higher contributions from the more prosperous Northern European nations. 

Experts admit a single budget would likely make the EU more economically sustainable, they also say common fiscal policies could indeed divert money flows from the European North to South, leaving Northern European countries at a disadvantage. 

But Moscovici is critical of such views, saying albeit that might be the case, economic stability in the Eurozone is more important, even if it means slower growth in its more developed member states. 

“If we accept the logic that there are always winners and losers, that logic is a threat to the euro”, he stressed.

Moscovici also said the EU must act quickly, as the risks posed by the volatile Brexit process and the ongoing trade tensions with the US could rapidly evolve into realistic threats to macroeconomic stability. 

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