Abstract
The fiscal governance of the European Economic and Monetary Union (EMU) was the result of a political compromise. This led to an imbalanced and unsustainable framework, which contributed to the outbreak of the Eurozone debt crisis. During the crisis, European leaders embarked on a reform effort whose outcome has been criticized for its complexity and lack of effectiveness; moreover, despite its innovations, the reformed fiscal governance has not signified a substantial departure from the previous regime’s failed philosophy. Against this background, the COVID-19 pandemic has posed a new fiscal challenge for the EMU. The massive fiscal intervention required to cope with the health crisis, the economic implications of the lockdowns, and the challenge of economic recovery has questioned the adequacy of EMU’s fiscal governance and has raised the prospect of a fragmented European economic landscape. The European Council’s agreement on Next Generation EU has been an undoubtedly positive development in terms of addressing short-term fiscal needs. However, its long-term impact on the supranational institutions of fiscal governance is limited and uncertain. The objective of this chapter is to review critically these changes in the design and evolution of EMU’s fiscal governance, through a decade of crises, under the analytical lens of political economy.
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Notes
- 1.
The coincidence of these criteria should not come as a surprise given that typically federal states are also monetary unions.
- 2.
Labour mobility is part of the wider criterion of labour market flexibility in OCA theory, which also includes the flexibility of wages according to economic conditions (Mundell 1961).
- 3.
There were other countries that did not meet the debt criterion but were close to it, which allowed the Commission to declare that, provided fiscal consolidation efforts continued, these countries’ debt would soon fall below the 60% threshold (European Commission 1998).
- 4.
The structural aspects of the balanced budget rule were introduced with the 2005 SGP reform.
- 5.
The ESM was preceded by the EFSF and the European Financial Stability Mechanism (EFSM) established in 2010.
- 6.
The political ‘stigma’ associated with ESM’s conditionality was clearly illustrated by the public debate on ESM’s new €240 billion Pandemic Crisis Support scheme, see next section, p. 16.
- 7.
- 8.
A particularly influential paper in this context was the so-called policy paper ‘No 91’ of the prestigious Centre for Economic Policy Research (CEPR), in which 14 prominent economists from Germany and France put forward a series of proposals for reform (Bénassy-Quéré et al. 2018). These proposals received praise but also critique, from many quarters, primarily for their lack of ambition and their affinity to the official German position. See, for example, the Blueprint for a democratic renewal of the eurozone, Politico, 28 February 2018 (the counterproposals of another 14 economists and politicians), Merler (2018) and Messori and Micossi (2018).
- 9.
On 4 June 2020, the ECB decided to expand the programme’s size to €1.350 billion and extend its duration to June 2021.
- 10.
The ‘frugal four’ are: Austria, Denmark, the Netherlands and Sweden. Shortly after the announcement of the Franco-German proposal they circulated their own counterproposal, which insisted on loans instead of grants, accompanied by conditionality, and explicitly rejected debt mutualization. Available at: https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2020/05/Frugal-Four-Non-Paper.pdf (last accessed on July 30, 2020). During the European Council negotiations, the ‘frugals’ became five, as Finland joined their position.
- 11.
The European Council also reached a long-awaited agreement on the multiannual financial framework (MFF) for 2021–2027. For details of the entire package agreed, see the European Council’s conclusions, available at: https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf (last accessed on July 30, 2020).
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Katsikas, D. (2021). Reforming Under Pressure: The Evolution of Eurozone’s Fiscal Governance During a Decade of Crises. In: Caetano, J., Vieira, I., Caleiro, A. (eds) New Challenges for the Eurozone Governance. Springer, Cham. https://doi.org/10.1007/978-3-030-62372-2_8
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