Alternatives to fiscal competition in European Monetary Union (EMU): what stabilization mechanisms for the Eurozone?

Résumé du document

The picture presented about the European integration is that of a hybrid creation. In the words of Wolfgang Wessels (1997), ?it is a messy and ambiguous division of labour between national and EU levels.' The Economic and Monetary Union which is the most accomplished framework of European Integration, is no exception to this rule. Indeed, the policy mix that stems from its institutions is innovative in nature. Monetary policy is gaining momentum by seeking centralization at the supranational level and its decision making is governed by the European Central Bank. However, the Fiscal policies continue to remain in the realm of national states. This repartition of roles is meant to permit the monetary policy to respond to symmetric shocks (i.e. shocks faced by an overwhelming majority of the EMU, such as an oil shock which is a classic example) while the corresponding fiscal policies of the member states correlate themselves with asymmetric shocks. An example of an asymmetric shock is the shock that Finland endured during the 1990s. A common regulation has been adopted which initially aimed at ensuring that the ECB will not be put under pressure to monetize a country's debt. This regulation is a constraint as it provides no room for fiscal maneuver. The regulation is termed as ?The Stability and Growth Pact.' Although the regulation widely caters to stability and growth, its functions and subsequent assignments between the supranational and the national levels seem to help the regulation in acquiring a high amount of importance and recognition from a political point of view.

Extraits

[...] What we can retain from this, is that in the absence of economies of scale, the allocation function should remain in local hands, as they are more able to respond to the heterogeneity of preferences of the local demand. This has well been integrated into European Community law in the form of the principle of subsidiarity[3]. The allocation function seems thus to be assigned to the government level recommended by the literature on fiscal federalism. The European Union Budget being very small (1,045 percent of EU GDP for the period 2007-2013), being subject to balance and being multi-annual it does not allow for any flexible fine-tuning of a stabilization nature. [...]

[...] First, because he simply lacks appropriate indicator as the output gap does not prove to be very reliable. Secondly, it is not always straightforward to distinguish ex ante if the current slowdown has to be attributed to a cyclical movement of the economy or is the consequence of structural elements. The fact that Japan took the 1990s sluggish growth for a cyclical phenomenon has aggravated its situation rather than improved it. The shortcoming of stabilization policies is that in the case of a real fall in productivity, it will postpone necessary adjustments. [...]

[...] Others use a higher cap of According to Mattoon (2002), low caps reduce the incentives to save. What we have decided to leave open here is how the fund should be “governed”. Wyplosz (2002) has made an interesting contribution in this respect by proposing the creation of an independent Fiscal Policy Committee, one that would receive the mandate of ensuring fiscal sustainability. It is however regrettable that this economist's proposal does absolutely nothing to reduce the democratic deficit that characterises the EU institutions. [...]

[...] This budget would then be able to fully assume its stabilization role as well as the internalization of economies of scale. The last step, which is quite anecdotic, resided in centralizing defence, which would then enlarge the budget by further 2,5 to of EC GDP. This ambitious goal of to of EC GDP can be explained by the integrationist climate of the 1970s. Meanwhile, some proposals have been made to temperate the size of an eventual budget without calling the centralization of its functioning. [...]

[...] In reality, it would have been particularly difficult for member states' politicians to assume the abandonment of both their monetary and their fiscal sovereignty in the same blow. We doubt however that the current EMU macroeconomic framework is optimal from an economic point of view. Indeed, it is our conviction that the spirit of the stability oriented EMU institutions (the ECB and the Stability and Growth Pact, mainly) resides in a cooperation that aims at doing no harm to the neighbour, i. e. no negative spill-over. We will argue that another form of cooperation is possible, one that targets a common internalization of externalities. [...]