No Escape from Politics
Four tests for a successful fiscal intrument in the Euro area
With his proposal for a euro area budget, Emmanuel Macron has put a common fiscal instrument back at the center of the euro area reform debate. The discussion about whether or not the euro area needs more fiscal integration may be older than the currency union itself, but there is good reason to believe that the coming months will be a critical juncture for European fiscal policy.
This policy paper makes two contributions to the debate. We start out by arguing that a common fiscal instrument is desirable. We suggest that proponents and opponents of fiscal integration alike should take heed of the unprecedented role the European Central Bank (ECB) played in safeguarding the stability of the euro area and facilitating its recovery. In our view, the more ill-at-ease one feels with the scale of the ECB measures, the stronger the case for joint fiscal policy becomes. From this perspective, alleviating the excessive dependence on monetary policy is a key rationale for developing a common fiscal instrument We then sketch out four tests that we argue a new fiscal instrument needs to pass to be both economically and politically successful.