Eurozone finance ministers have agreed on a broader framework for the bloc’s future joint budget, which will allow standardising fiscal policies, boosting economic growth, and addressing future economic shocks in the 19-country single currency area.
Kristian Rouz – Top EU ministers have reached a compromise agreement on a plan to establish a common fiscal policy framework within the bloc. The proposal, made by French President Emmanuel Macron and backed by German Chancellor Angela Merkel last year, still needs more work, some EU officials say, to determine the scale and sources of funding for the new mechanism.
Following a 12-hour meeting on Friday, EU finance ministers said they’ve reached a broad understanding on a Eurozone budget. A common fiscal policy is expected to advance the European integration process and further level the playing field for private-sector enterprises across the Eurozone.
Officials say the new framework would boost the efficiency of fiscal policies across the bloc, help battle inequalities and discrepancies between individual member states and their economic development, as well as prevent future economic shocks.
“We did tonight what we had set out to do: we’ve created a genuine Eurozone budget”, French Finance Minister Bruno Le Maire said. “For the first time, we have created an operational budget that will help Eurozone countries to converge and become more competitive. It’s a breakthrough”.
However, some EU officials warn that a general understanding of a joint budget is not enough, and talks must progress on a quicker timeline. Eurogroup Chair Mario Centeno said the size of the new mechanism still remains unclear, along with the sources of its funding. He said the ministers have made several important “small steps” towards a joint budget, but a lot of work has yet to be done.
Centeno also revealed the technical name that the ministers chose for the new fiscal mechanism – the Budgetary Instrument for Competitiveness and Convergence (BICC).
Some economists say the Eurozone might not be able to launch a full-scale budget in the near-term perspective, and would at first establish a limited fiscal facility to redistribute wealth across its member-states. Eventually, that mechanism could grow to a full-size budget, big enough to operate on a scale of the $19.1-trillion Eurozone economy.
The Eurozone’s GDP is only slightly smaller than that of the US, meaning a common budget would have to be somewhat similar in size than America’s $4.407-trillion federal budget.
EU officials say the bloc is gradually moving towards a similar-style budget, while individual member-states will likely retain their own fiscal tools to solve local and regional tasks.
“For the first time, we will start thinking about the future as a coherent bloc and coordinating our economic policies”, Le Maire added.
However, observers point out that even if the Eurozone establishes a full-size joint budget, officials in Brussels might struggle to find consensus on fiscal decisions, as the EU Parliament comprises 751 MEPs, while the US Congress has only 535 voting members across its two chambers.
A smaller legislative body theoretically makes decision-making easier, and yet even the US Congress regularly has bloody battles over the budget and fiscal policies – such as public spending, financing of government agencies and national projects, as well as the issues of deficit and debt ceilings, among other things. Disagreements in the US Congress sometimes lead to government shutdowns.
For its part, the Eurozone would be facing a similar challenge to its own fiscal policies. However, the larger size of EU bureaucracy, the bloc’s multi-party system (as opposed to just two major parties in the US), and – most importantly – the traditional North-South divide in the approach to fiscal policies, could make Eurozone shutdowns more frequent and severe.
“We still have a long way to go, in particular on how we finance the new budget, and I don’t underestimate the challenges ahead”, Le Maire said.
EU officials say the common budget has yet to become a practical and operational system, and finance ministers are now expected to decide how the facility will be financed. Participating member-states could potentially divert a fixed percentage of their fiscal revenues towards the new framework.
Critics say the common budget must promise certain benefits to each of the member states – including both the advanced economies such as Germany and the debt-ridden nations of Southern Europe, such as Italy or Greece.
“The budget does not deal with the other issue that from an economic perspective is also important: macroeconomic stabilisation”, European Stability Mechanism Director Klaus Regling said.
Experts say there are still a lot of arguments in favour of and against the joint budget, meaning that finance ministers will have to find compromise solutions to many sticking points before the mechanism can be implemented.
Macron and Merkel are planning to launch the Eurozone’s joint budget in the early 2020s.