France and Germany have agreed on a draft proposal for a single Eurozone budget and fiscal policy, aimed at improving economic growth, as well as erasing some of the mounting fiscal challenges in Southern European member-states, including Italy.
Kristian Rouz — Officials from the Eurozone’s two largest economies, France and Germany, say that they have reached a consensus on basic principles of a single budget for the bloc. Proposals for a common fiscal policy have been floated for years as a possible next step in the European integration project, and the push for a greater Eurozone unity has intensified in the wake of Brexit.
According to a report from the German government on Friday, Germany and France have agreed on a detailed plan to establish a fiscal union in the Eurozone, which will create a single budget to standardize the level of taxation and spending across the bloc.
The proposal is expected to erase the long-lasting — and quite problematic — divide between fiscal policies in the European North and South, which, some experts believe, led to the Greek budget crisis back in 2015.
The new plan, officials say, will boost economic growth, create jobs, and improve the international competitiveness of the Eurozone as well.
Additionally, officials said, a single fiscal policy would level the playing field for European companies operating across the Eurozone, and end the years of bitter divide between the tighter budget policies in the North, and loose policies in the South, while keeping budget deficits in countries such as Italy and Spain in check.
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“The purpose of the Eurozone budgetary instrument would be to foster competitiveness and convergence in the Eurozone”, the single budget proposal read, according to reports. “As agreed by the summit, the instrument should be part of the EU budget. It would not be credit-based”.
Aspiring member states, locked into the two-year waiting period to join the Eurozone, will also be part of the single budget area, according to the proposal. Officials believe this would facilitate their entry into the bloc by bringing their national budgets to European standards of deficits and spending.
This announcement comes amid new revelations of fiscal turmoil in Italy, which might have fuelled the push for a single European budget.
The populist Italian government has sought to increase budget spending while cutting taxes, creating a potential increase in its near-term deficits, and some experts have suggested that this could spread fiscal contagion across the Eurozone.
But French and German officials appear to be determined to prevent such a scenario.
“Don’t underestimate the impact of the Italian recession”, French Economy Minister Bruno Le Maire said. “We talk a lot about Brexit, but we don’t talk much about an Italian recession that will have a significant impact on growth in Europe and can impact France because it’s one of our most important trading partners”.
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Italy’s economy has been slowing in the recent several quarters, while the aftereffects of its 2017 banking sector crisis and the rising polarisation of wealth have made it harder for Rome to meet its 2 percent budget deficit target.
While more recent fiscal proposals have suggested that Italy could abandon the target altogether, France and Germany believe a single fiscal policy could come to the rescue. This is despite that the fiscal union is not expected to come into reality until the year 2021.
“There are no measures capable of positively impacting on (Italy’s) long-term growth”, a leaked document from the European Commission read, as officials have found that the nation’s economy slid into contraction in the last quarter of 2018.
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Meanwhile, Italian officials are defiant towards the European Commission’s warnings.
“The government budget’s measures need time to have positive effects on the economy,” Italian Deputy Prime Minister Matteo Salvini said.
For their part, France and Germany believe the fiscal union proposals will drive an influx of investment across the Eurozone, which could potentially offset some of the most troubling developments in several problematic countries, including Italy.
The joint Franco-German proposal also suggests that Eurozone member-states are poised to ramp up consultations on a joint budget in the coming weeks, moving towards the practical implementation of a single fiscal policy.