Fiscal Capacity & Stablization Function Within the Eurozone: A Matter of Uncertainty

– Nathanael Kos’isaka

The Economic and Monetary Union (EMU) is based on an asymmetry: On one hand, there is the monetary dimension which falls within the exclusive competence of the European Central Bank (ECB), on the other hand, there are the economic and budgetary domains which fall within the competence of the Member States.

There is, therefore, no centralization of the fiscal pillar within the euro area. Budgetary policies have remained national. This has resulted in a system of coexistence between a single monetary policy pursued by the ECB and budgetary policies conducted by the Member States. This institutional architecture had an economic impact: by limiting fiscal integration, it did not organize the existence of a stabilization function at a centralized level. There was no budget for the euro area. Indeed, macroeconomic stabilization is one of the tasks traditionally pursued by a federal budget. However, it must be understood that this organization of things was not the result of chance.

This “organic dispersion” which characterizes that the economic pillar of the EMU is the result of a deliberate choice made by the Member States, as soon as the euro was created, in order to reconcile on the one hand their wish to benefit from the advantages which one can draw from a single currency and, secondly, their desire to preserve their sovereignty.

At the time it was made, this choice was not, in the eyes of its promoters, meaningless. This architecture was supposed to be viable, despite the lack of centralization at the budget level. There was a rationality to the system, as it existed before the crisis. On the one hand, there was the (ECB), which was supposed to absorb the shocks affecting the entire zone by acting on interest rates. On the other hand, there were national fiscal policies that managed specific shocks. Such a configuration could not pose any problems as long as public finances were healthy. But the arrangement from Maastricht has failed, and can be seen both before and after the crisis. Before the crisis, the Stability and Growth Pact could not eliminate sovereign debt risks. The advent of the sovereign debt crisis demonstrates this. During the crisis, the ECB’s monetary easing instruments proved their limit, while the Member States had to tighten their fiscal policies.

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