A eurozone budget is an idea whose time, at last, may have come. But what is on the table contains familiar flaws.
Gabriele de Angelis
The Eurogroup meeting
of October 9th reached a detailed agreement on a budgetary instrument
for convergence and competitiveness (BICC)—in short, the long-awaited
eurozone budget.
The eurozone is in dire need of a budgetary
instrument which paves the way to rebalancing growth opportunities in a
continent plagued by persistent macroeconomic imbalances, productivity
gaps and, consequently, growing inequality.
In particular, countries still struggling to achieve full recovery
after ten years of sluggish growth, or in the middle of an economic
downturn, need to be helped to stay the course of productivity-enhancing
reforms and public investment.
But the terms of the agreement
create serious cause for concern. The problem lies in the redistributive
conflict among Eurozone members which the BICC’s governance structure
is likely to spark.
Join our growing community newsletter!
"Social
Europe publishes thought-provoking articles on the big political and
economic issues of our time analysed from a European viewpoint.
Indispensable reading!"
Polly Toynbee
Columnist for The Guardian
‘National ownership’
The instrument is
meant to support ‘structural reforms’ and ‘public investment’ through
awarded grants. The size of the grants is predefined, with a 25 per cent
national co-financing rate, to set a limit on the budget’s
redistributive effect and guarantee ‘national ownership’ of—and
therefore true commitment to—the reform and investment projects.
As of the final agreement
reached at the Eurogroup meeting, the Euro Summit and Eurogroup will
give annual strategic guidelines on key reform and investment
priorities, whicht will feed into ‘strengthened Euro Area
Recommendations’. Member-state proposals will be assessed by the
Eurogroup on the bases of the European Commission’s ‘initial feedback’,
with the latter giving final approval.
The final iteration of the
BICC’s governance structure is an improvement on the June version, which
assigned only a minor role to the commission. In the first draft, the
Eurogroup would also assess progress on reform paths and, through this,
decide on the disbursement of further grant instalments (the final
version does not mention monitoring, which leaves us in doubt as to
which mechanism will apply in the end). The strictly intergovernmental
structure foreseen in the first version would have been much more at
risk of sparking political conflict among eurozone partners.
Implications
Such
a design for the eurozone budget has three implications. First, member
states are likely to see funds as national contributions with a
redistributive effect. Secondly, some states will be long-term net
contributors, while others will be long-term net recipients, as
allocation will be based on population and (the inverse of) per capita
gross domestic product. And, thirdly, intergovernmental entities will
play a decisive role in determining how the budget has to be spent at
the national level, as the final agreement foresees that member states’
proposals should be ‘linked to the National Reform Programme’ and
‘compatible with the national budgetary process’, with approval
depending on ‘the previous year’s Country Specific Recommendations’
(CSR).
Watch the latest Social Europe Video Podcast
At
first sight, this all looks correct, as common resources will be used
according to common priorities while reducing moral hazard to the extent
that funds are set to encourage structural reforms and compliance with
budgetary rules. Additionally, if a net contributor wants to reduce the
BICC’s redistributive effect, it will be incentivised to promote
measures that improve the recipient’s GDP per capita. Therefore, the BICC seems to be in the best position to promote actual convergence.
Nevertheless,
this represents, in fact, a risky structure of incentives with
potentially perverse effects. First, net contributors are likely to have
a much stronger voice than net recipients. Therefore, they will also
have a decisive say on the design of the structural reforms to be
implemented at national level. Secondly, they will have an incentive to
reduce their overall exposure to other members’ systemic risks.
Therefore, net contributors will have an interest in privileging
structural reforms that are likely to achieve such an effect.
Thirdly,
the BICC’s endowment will have to be determined during the Multiannual
Financial Framework negotiations. Therefore, net contributors will
easily be able to trade off the BICC’s size against their own reform
preferences.
Austerity policies
We have
already seen what happens in the presence of such a clash of diverging
national interests. It is the same constellation as led to the austerity
policies supervised by the ‘troika’—of the commission, the European
Central Bank and the International Monetary Fund—in countries under
financial assistance, in which cost reduction, and in particular
downward flexibility of the cost of labour, was key to all implemented
structural reforms. This would be a disappointing result, as well as a
setback for those governments and experts who have fought for the idea
that there is more than one path to competitiveness and fiscal
consolidation.
Indeed, such an
arrangement risks strengthening the eurozone’s bias towards supply-side
approaches to structural reforms. Welfare provisions and collective
bargaining will still be seen as factors which hold back adjustment in
tough times and reduce growth potential in good times, and the role of
both internal and eurozone-wide demand in economic recovery will continue to be downplayed.
Thus
far, the impact of such a dominant orientation towards economic
policies has been tempered by the complex negotiations which accompany
the European Semester, the non-binding nature of the European Council’s Broad Economic Policy Guidelines and the loose implementation of CSR.
Democratic control
This
could, however, change rapidly if the Euro Summit’s guidelines for
structural reforms become a requirement for drawing on the eurozone
budget. As desirable as it might be to have effective rules, the
proposed framework could considerably pre-empt national democratic
control of economic policies, without significantly enhancing growth
options.
The legislative procedure to be opened in the coming
months will be decisive in determining whether the eurozone budget will
be the long-sought instrument of convergence or yet another episode of
the European redistributive conflict.
Indeed,
the financing mechanisms will determine who the ‘owners’ of the budget
will be. These can be either the member states or the European citizens,
depending on whether it derives from member states’ contributions or
the EU’s own resources. To offset the structure of incentives inherent
in the current proposal, the latter must apply.
This might also be
the right moment for the European Parliament to claim a greater role as
a co-decision-maker in the definition of reform and investment
priorities, including the Broad Economic Policy Guidelines. This would
strengthen democratic control of the eurozone budget, enable fair debate
of economic-policy options and secure the efficacy of the instrument. Vice versa,
an ill-designed eurozone budget risks adding to the political disarray
among eurozone members—and might, therefore, be ineffective.
No comments:
Post a Comment