Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Why Fiscal Policy In The Eurozone Should Be Fully Renationalised

Thomas Fazi 4th November 2015

Thomas FaziThe global financial crisis has exposed the deep flaws of the euro, and particularly Maastricht’s original sin: to have deprived member states of their fiscal autonomy – by taking away their power to issue money and by imposing strict (and totally arbitrary) limits on government deficits through the Stability and Growth Pact (SGP) – without transferring this spending power to a higher authority, i.e., some form of central government. Or, to put it differently, to have created a monetary union (with, importantly, full capital mobility) without foreseeing the creation of a fiscal and political union capable of addressing structural imbalances and asymmetric negative shocks across the union. This left member states utterly defenceless in the face of economic crises, as the 2008 booms-gone-bust would make amply clear.

Yet, the crisis – which, it is worth remembering, was caused by a build-up of private, not public, debt – didn’t awake European leaders to the need to relax the Maastricht straitjacket, by loosening the budgetary constraints imposed on individual governments (thus allowing them to pursue counter-cyclical stimulus policies) or by moving towards a fully-fledged fiscal union (or at least a modicum of economic coordination between surplus and deficit countries). Instead, Europe’s powers that be – essentially the Berlin-Frankfurt ‘axis of austerity’ – chose to tighten the screws even further, first by imposing on the continent a brutal policy of asymmetric, class-based, demand-crushing austerity and then by ‘locking in’ those supposedly ‘emergency’ measures through the adoption, behind closed doors and beyond public scrutiny, of a complex system of new laws, rules, agreements and even a treaty – the Fiscal Compact – aimed at enforcing permanent austerity on the continent, whatever the cost (and on a much greater scale than that foreseen by the Maastricht Treaty). Importantly, the severe restrictions imposed on the fiscal autonomy of member states since 2010 have not been offset by an increase in the fiscal capacity at the federal level in Europe (on the contrary, the already meagre EU budget has been steadily shrinking since the start of the crisis). The result, predicted by many non-mainstream economists, has been a deeper and more prolonged crisis that of the 1930s (resulting in all-out humanitarian crises in a number of countries).

Thus, it is understandable that many commentators have welcomed the German finance minister Wolfgang Schäuble’s recent call for a ‘fiscal and political union’ backed by a ‘euro budget’. Schäuble is right to advocate institutional changes that might provide the eurozone with its missing political mechanisms, but we have to ask: is fiscal union – and, more specifically, the kind of fiscal union advocated by the German finance minister – what Europe needs at the moment? As argued by Philip Arestis and Malcolm Sawyer, an effective fiscal union would require tax-raising powers at the EMU level in the order of at least 10 per cent of the EMU’s GDP; fiscal transfers from richer to poorer countries; a federal authority with the capacity to engage in deficit spending; the support of the ECB in the operation of fiscal policy; a proportionate transfer of democratic legitimacy, accountability and participation from the national to the supranational level; etc.

Unfortunately, the fiscal union proposed by Schäuble is very different: it revolves around the creation of a European Budget Commissioner with the power to reject national budgets – a supranational fiscal enforcer – but doesn’t foresee the creation of a federal institution with legislative and spending powers. As for the proposed ‘euro budget’, we can expect it to operate according to the well-oiled money-in-exchange-for-reforms logic dear to Dr Schäuble. As Yanis Varoufakis writes: ‘The new high office would be annulling the sovereignty of a European people without having replaced it by a higher-order sovereignty at a federal or supra-national level’. In other words, sovereignty is not being elevated to the European level, it is simply being usurped from the national level, thus accomplishing a lifelong neoliberal dream: the complete separation between the democratic process and economic policies, and the death of active macroeconomic management. This has been described as ‘the politics of depoliticisation’.

It’s not hard to see why such a development would be politically unsustainable, further exacerbating the union’s centrifugal tendencies. Moreover, given the current balance of power in Europe, which sees Germany firmly in the driving seat, the kind of post-democratic, top-down ‘federalism’ proposed by Schäuble would almost certainly subject the EMU to an even tighter deflationary, contractionary and mercantilist straitjacket – and for this reason should be firmly rejected. At the same time, we have to acknowledge that the political conditions are not ripe for a move toward a fully-fledged fiscal and political union, along the lines outlined above. So – barring a break-up scenario – what options does that leave us within the context of the EMU?

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

The only sensible solution in the short-medium term is to acknowledge that a number of eurozone countries, especially those of the periphery, are in balance sheet recession – a situation in which individuals and companies, following the burst of a debt-financed bubble, collectively focus on saving rather than spending, thus reducing aggregate demand – and in desperate need of a fiscal stimulus, and should thus be allowed to pursue much more expansionary fiscal policies until private sector balance sheets are repaired. This, of course, means scrapping the Fiscal Compact. In order for this to be politically and economically viable, two conditions are necessary: 1) there should be no increase in Germany’s sovereign or private liabilities vis-à-vis periphery countries; 2) periphery countries need to ensure that idle savings in these nations do not flow abroad but are invested in local government bonds.

As argued by Richard Koo, this can be achieved by ‘re-internalising’ fiscal policy in the EMU: i.e., by prohibiting member states from selling government bonds to investors from other countries. As Koo writes, ‘the proposed new rule would allow individual governments to pursue autonomous fiscal policies within its constraint. In effect, governments could run larger deficits as long as they could persuade citizens to hold their debt. This would both instill discipline and provide flexibility to individual governments. A softer version of this plan would involve the introduction of different risk weights for local and foreign bonds.

Moreover, as noted by Philippe Legrain, Germany’s fears of mutualisation could be further assuaged by reinstating the ‘no bailout rule’ (violated by Germany itself in 2010 to save its own banks) and by creating a mechanism for restructuring the debts of insolvent sovereigns. Such a solution would have a number of economic and political benefits: not only would it have an immediate macroeconomic impact (thus leading to increased debt sustainability), it would also engender a more positive attitude toward European institutions (which would no longer be seen simply as enforcers of watertight fiscal rules), thus slowly re-creating the conditions – in the longer run – for moving toward a true solidarity-based and democratic fiscal and political union.

This article appeared in a shorter version in the Autumn 2015 edition of Europe’s World

Thomas Fazi

Thomas Fazi is a writer, journalist and activist. He is the author of "The Battle for Europe: How an Elite Hijacked a Continent – and How We Can Take It" Back (Pluto, 2014) and "Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World", co-authored with economist Bill Mitchell (Pluto, 2017).


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Home ・ Economy ・ Why Fiscal Policy In The Eurozone Should Be Fully Renationalised

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak
Big Tech,Big Oil,Big Pharma,agribusiness,wealth,capital,Oxfam,report,inequality,companies Control the vampire companiesJayati Ghosh

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube