Benoît Coeuré: A budgetary capacity for the euro area
Introductory remarks by Mr Benoît Coeuré, Member of the Executive Board of the European
Central Bank, at a public hearing at the European Parliament, Brussels, 2 March 2016.
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Madam Chair, Mr Chair,
Honourable Members of the European Parliament,
Ladies and gentlemen,
I am grateful to the two rapporteurs and to the two committee chairs for holding this hearing
today to advance the public debate on a fiscal capacity for the euro area. We are all well aware
that political attention is largely focused elsewhere, but we should not lose sight of the objective
of completing Economic and Monetary Union (EMU), securing its capacity to absorb economic
shocks and creating confidence today in its future economic performance. As I have said
elsewhere, if downside risks to the recovery were to materialise, this would not make it easier
to respond to the refugee crisis or to counter terrorism.1
A quick glance at fiscal policies today should further convince us of the importance of this
discussion:
• The recovery in the euro area is proceeding at a sedate pace; it is mainly supported
by our monetary policy measures and by the low price of energy. At the same time,
the global economy is overshadowed by renewed uncertainty and broader geopolitical
risks.
• Public finances in many euro area countries are still in a fragile condition. After the
past significant progress in fiscal consolidation, fiscal policy is at present mildly
expansionary on average in the euro area. In many Member States, even though
quality improvements by changing the composition of fiscal spending are still possible,
high debt levels leave no room for fiscal manoeuvre. Only very few countries currently
have fiscal space available. Rigidities in the economic structure of several Member
States, although being addressed, are still significant.
This situation casts doubt on the euro area's capacity to face future economic shocks. A key
policy challenge is therefore how to dispel these doubts today and to make sure that the euro
area is well-prepared for downturns.
As one of two central bankers on this podium, it is not my role to explain to you which specific
design of a fiscal capacity would be the right choice for the euro area. This is a political choice
and should be the outcome of a political discussion.2
What I can offer you today is my assessment, as an economist, as to why we need a fiscal
capacity for the euro area, why it cannot be the silver bullet that will make EMU work better,
and under what conditions it could function well.
Fiscal policies in EMU
The role of fiscal policies in EMU has been at the core of the policy debate for some time now.
Fiscal policies span a broad range of issues, ranging from public investment and collective
goods - allocative functions that would also include the EU budget - to tools for
macroeconomic stabilisation. Today, rather than discussing what, broadly speaking, fiscal
policy could do to support growth at the current juncture, I will focus on how well-designed
fiscal policies in an economic and monetary union - where monetary policy is exercised at the
European level - could act as an instrument for stabilisation.
Let me start by clarifying that the euro area today is not at a crossroads between two starkly
different routes, namely, responsible national fiscal policies on the one hand and a common
fiscal capacity or a euro area budget on the other, with the choice between the routes being
based on political or philosophical priors. From an economic standpoint, these are
complementary. And in fact, we already have elements of both.
First, a precondition for fiscal policies to be able to contribute effectively to macroeconomic
stabilisation is to ensure that markets have faith in the sustainability of public finances. And
that is why adherence to, and the full and consistent implementation of, the Stability and
Growth Pact and Fiscal Compact is so important. As I have said before, this is not a matter of
theology; it is a political and economic imperative. Markets need to trust the capability of our
governance framework to effectively coordinate fiscal policies in EMU, and citizens need to be
confident that common rules are being respected. Let me add that any common fiscal capacity
will be financed by current or future taxes on the same taxpayers and companies which already
fund their national budgets. We cannot add to this edifice if its foundations are shaky, that is,
if national budgets are not clearly sustainable.
In concrete terms, this means that Member States should rebuild fiscal buffers into their
national budgets to be able to weather future economic shocks, while at the same time
adjusting the composition of their fiscal policies to optimally support the recovery. Once these
buffers are available, the Stability and Growth Pact provides ample flexibility to adjust fiscal
requirements to enable the functioning of automatic stabilisers on a national level and to react
to a severe downturn in the euro area as a whole if need be. Whether the Stability and Growth
Pact should be further reviewed or complemented with new features, such as sovereign debt
restructuring mechanisms, to improve ownership and set the right incentives is an open
question, with ramifications which go far beyond our discussion today. But in any case, trust
will not be rebuilt if we start by unravelling the existing rules.
Second, we have seen during the crisis that, without monetary policy instruments at the
national level, fiscal policies can become overwhelmed if country-specific shocks are very large
and not well catered for by the shock-absorbing capacity of the economy and the financial
sector. Action can and should be taken to reduce the probability and size of such large shocks.
The banking union, with its Single Supervisory Mechanism, Single Resolution Mechanism and
the new bail-in rules, goes a long way in this direction, provided that all these elements are
implemented in a resolute and consistent way. But we cannot responsibly assume that the
euro area will from now on be immune to crises. The Five Presidents' Report therefore calls
for the creation of a shock-absorption capacity at the euro area level to complement the
automatic stabilisers of Member States.
And last but not least, there is ample scope for euro area countries to better absorb shocks
internally, by having suitably resilient economies. Additionally, we need to improve and
strengthen labour mobility and risk-sharing via financial markets. This is another reason why
completing the banking union, and why complementing it with a capital markets union with
substantial cross-border equity links, is so important. And this also reminds us of the
importance of preserving labour mobility from the temptation of raising new fences.
A fiscal capacity for the euro area
There are many ways a euro area fiscal capacity could be implemented, ranging from simple
macro insurance or an unemployment benefit scheme to a fully-fledged euro area budget that
could include the provision of public goods. Each of these options entails its own technical and
political challenges and opportunities. In the end, the choice as to which option or combination
of options should be adopted will need to be a political one. This is in fact an opportunity to
have a debate about Europe's collective goals; such a debate is more necessary than ever
and goes beyond the economic sphere alone.3
From the perspective of the economist and of the central banker who has a keen interest in
making EMU as a whole work better, the crucial question behind the discussion about a fiscal
capacity for the euro area is how to maximise its positive effects on the functioning of EMU,
while at the same time preserving incentives for sound fiscal policy-making and addressing
structural weaknesses at the national level.
To start with, we should all be able to agree that the objective of the fiscal capacity should be
to make EMU more resilient by increasing the capacity for automatic stabilisation in the euro
area. The aim should not be to actively fine-tune national economic cycles or to equalise
revenues. This is in line with the design principles described in the Five Presidents' Report,
which notably insists that a fiscal capacity should not entail permanent transfers in one
direction. A fiscal capacity in this sense would also be distinct in nature from more allocative
tools such as those provided for by the EU budget.
To be able to reach this objective, and based on my introductory remarks, I believe we need
to see significant further progress along the following three dimensions:
First, a pooling of fiscal resources, whatever their nature and size might be, only works if
solidarity goes hand in hand with shared responsibility. A move towards more fiscal
risksharing in EMU would therefore require a commensurate shift towards increased joint
decisionmaking within strong common institutions. In any case, access to a joint euro area fiscal
capacity should be made conditional on compliance with the fiscal rules of the Stability and
Growth Pact.
Second, we should aim at containing the burden that falls on fiscal policies by strengthening
market-based adjustment. As Ludwig Erhard famously said, we need "as much market as
possible, as much state as needed". This means structural reform at the national level. But it
also means completing banking union and supplementing it with a comprehensive capital
markets union at the European level. In addition, this calls again for completing the Single
Market more broadly, including in the services sector.
Third, it lies at the very heart of all insurance that risks are distributed equally ex ante. When it
comes to mutual insurance against asymmetric shocks, it is clear that fiscal risks do not always
stem from fiscal action, but from unsustainable economic and financial policies elsewhere.
Therefore, any move in this direction should be accompanied by a new convergence process
towards more resilient economic structures. Such a process would allow us to advance
together towards a better-equipped EMU, outlining a clear path of reform and a commitment
to a fiscal capacity. Political convergence is needed to kick off such a process, as any new
convergence process can only be as effective as the legitimacy underpinning it.
Conclusion
Let me conclude by saying that protection against moral hazard is of course very important. At
the same time, it should not be used as a strategy to relegate the move towards a fiscal
capacity for the euro area to never-never land. The move towards a fiscal capacity could take
the form of a gradual and conditional process that allows us to move in parallel towards
restored fiscal buffers at the national level, convergence in the capacity to absorb shocks at
the national level and a strengthening of institutions at the euro area level, while moving,
equally gradually, towards more central fiscal stabilisation.
I think we should be more ambitious in that respect. In fact, I would even argue that there is an
urgent need to accelerate our efforts to complete the EMU architecture with a fiscal capacity.
Although we should acknowledge that this will take time, and that getting it right will require
effort and precision, we should act without delay and speed up our work.
Thank you for your attention