A budget for Europe's Monetary Union. Bruegel Policy Contribution 2012/22, December 2012

In a monetary union, national fiscal deficits are of limited help to counteract deep recessions; union-wide support is needed. A common euro-area budget (1) should provide a temporary but significant transfer of resources in case of large regional shocks, (2) would be an instrument to counteract severe recessions in the area as a whole, and (3) would ensure financial stability. The four main options for stabilisation of regional shocks to the euro area are: unemployment insurance, payments related to deviations of output from potential, the narrowing of large spreads, and discretionary spending. The common resource would need to be well-designed to be distributionally neutral, avoid free-riding behaviour and foster structural change while be of sufficient size to have an impact. Linking budget support to large deviations of output from potential appears to be the best option. A borrowing capacity equipped with a structural balanced budget rule could address area-wide shocks. It could serve as the fiscal backstop to the bank resolution authority. Resources amounting to 2 percent of euro-area GDP would be needed for stabilisation policy and financial stability.

The false promise of a eurozone budget. CEPS Commentary, 7 December 2012

n this new CEPS commentary, CEPS Director Daniel Gros takes a closer look at the US experience to point out that the federal budget provides much less insurance against state specific shocks than widely assumed, while the US Banking Union act as a very powerful shock absorber. Accordingly, he argues that the euro’s long-term stability depends far more on completing plans for a European banking union than on the introduction of a fiscal capacity for the eurozone.

Options for a Euro-area fiscal capacity. Bruegel Policy Brief 2013/01, January 2013

Europe has responded to the crisis with strengthened budgetary and macroeconomic surveillance, the creation of the European Stability Mechanism, liquidity provisioning by resilient economies and the European Central Bank and a process towards a banking union. However, a monetary union requires some form of budget for fiscal stabilisation in case of shocks, and as a backstop to the banking union. This paper compares four quantitatively different schemes of fiscal stabilisation and proposes a new scheme based on GDP-indexed bonds. The options considered are: (i) A federal budget with unemployment and corporate taxes shifted to euro-area level; (ii) a support scheme based on deviations from potential output;(iii) an insurance scheme via which governments would issue bonds indexed to GDP, and (iv) a scheme in which access to jointly guaranteed borrowing is combined with gradual withdrawal of fiscal sovereignty. Our comparison is based on strong assumptions. We carry out a preliminary, limited simulation of how the debt-to-GDP ratio would have developed between 2008-14 under the four schemes for Greece, Ireland, Portugal, Spain and an ‘average’ country.The schemes have varying implications in each case for debt sustainability

Fiscal policy, banks and the financial crisis. National Bank of Belgium Working Paper No. 234, October 2012

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.

Opportunities and challenges in the area of employment, social affairs, skills and labour mobility. EPC Commentary, 30 September 2014

On 1 October 2014, Marianne Thyssen, Commissioner-designate for Employment, Social Affairs, Skills and Labour Mobility, will face a European Parliament (EP) hearing. On this occasion, Thyssen will have to perform a delicate balancing act consisting of on the one hand, taking into consideration the significant budget constraints that a number of Member States are still facing and following the still prevailing political line of fiscal consolidation and sound public finances, and on the other hand, of demonstrating her strong commitment for Social Europe. In the context of the upcoming hearing, this commentary aims to outline the features, opportunities and challenges of the new portfolio related to employment and social affairs in view to providing an input into the political debate.

Ukraine: sovereign decentralisation or federalism without sovereignty? OSW Commentary No. 133, 18.04.2014

A key element of Russia’s policy towards the new government of Ukraine concerns demands for a constitutional reform that would transform the country from a unitary into a federal state in a way that would considerably privilege the eastern and southern regions. Such a change to Ukraine’s administrative system would enable Moscow to put pressure on Ukraine’s central government via the regions. In order to achieve its objectives, Russia has been pressuring Kyiv to establish a constitutional assembly in a form that would guarantee the endorsement of solutions dictated by Russia. In other words, Russia has been demanding, in what is practically an ultimatum, that Ukraine give up one of the fundamental sovereign rights of a state, the right to freely determine its system of government. Transforming Ukraine into a federal state is an unacceptable idea, primarily because the intention behind Russia’s demands is to undermine Ukraine’s sovereignty, both through the content of the proposed changes and the way in which they are to be implemented. However, keeping in place the current, centralist model of state governance is not a feasible alternative. Ukraine will have to grant its regions broad self-governance powers, including the power to hold local referendums, and to transfer a considerable portion of the prerogatives currently held by the state to the local self-governments, along with adequate financial resources. That is because decentralisation along these lines is the only way forward towards a modern democracy in Ukraine. Russia’s policy has forced Kyiv to undertake legislative work on constitutional reform as a matter of urgency, rather than waiting until a new parliament is elected in which the new, post-Maidan balance of political power will be reflected, as political logic would require. The first draft of the constitutional amendments (of which no details are known at this stage) is to be presented in mid-May, and is expected to come into force in early autumn. However, whether these plans can be put into practice depends on further developments in the eastern part of Ukraine, because (among other reasons) if a state of emergency is introduced, the constitutional amendment process will have to be suspended.

Federation without federalism. Relations between Moscow and the regions. OSW Study 49/2014

The regions of the Russian Federation are immensely diverse economically and geographically as well as when it comes to their national identity, civic awareness and political activity. We are in fact dealing with a ‘multi-speed Russia’: along with the post-industrial regions with their higher living standards and a need for pluralism in politics, there are poverty-stricken, inertial regions, dependent on subsidies from the centre. As a result of the policy of centralisation pursued by the Kremlin since 2000, the autonomy of the regions has been reduced fundamentally. This has affected the performance of the regional elites and made it difficult for the regions to use their natural advantages (such as resources or location) to their benefit. One of the effects of this policy has been the constantly decreasing number of the donor regions. The current model promotes the role of the region as a passive supplicant, for whom it is easier to seek support from the central government, offering loyalty in exchange, than to implement complex systemic reforms that would contribute to long-term development. Moscow’s control (political, economic and administrative) over the regions is currently so thorough that it contradicts the formally existing federal form of government in Russia.

The fiscal compact - Europe's "hard core" based on German economic conditions. OSW Commentary No. 71, 2012-03-07

On 2 March, the leaders of 25 EU member states signed the Treaty on stability, coordination and governance in the economic and monetary union. It will introduce new fiscal constraints and officially vest new competences in the eurozone countries. Thus, their right to coordinate economic policy among them will be sanctioned. So far, the Lisbon Treaty has only provided for organisation of informal Eurogroup meetings, to be attended by representatives of the European Commission. The principles introduced by the compact, if the eurozone countries are really determined to observe its provisions, will create a new way of managing the single currency. Within the next few years, the most indebted countries will have to carry out radical reforms to boost their competitiveness and adjust it to German standards. During this period the Federal Republic of Germany will most probably decide to offer higher loan guarantees to relieve these countries’ budgets. The compact’s political consequences are also of great significance, especially considering how the treaty was finalised. The eurozone states have in fact accepted that the direction for changes will be devised by France and Germany, and the role of European institutions such as the Commission or the Parliament may weaken. From the perspective of eurozone candidate countries, the introduction of the fiscal compact means expanding the scope of conditions they must meet to become members of the single currency area. In the future, a country, in order to adopt the single currency, will have to meet the structural deficit criterion, and also most probably carry out economic reforms such as unifying its fiscal system. These goals will be achieved across the eurozone gradually, in the subsequent stages of the economic governance reform.

Designing a Genuine EMU: Which "Unions" for EU and Eurozone? Bruges European Economic Policy (BEEP) Briefing 34/2014

The initial ‘framing’ (in the summer of 2012) of the ‘genuine EMU’ for the wider public suggested to design an entire series of ‘unions’. So many ‘unions’ are neither necessary nor desirable – only some are and their design matters. The paper critically discusses first the negative fall-out of the crisis for EMU, and subsequently assesses the fiscal and the banking unions as accomplished so far, without going into highly specific technical details. The assessment is moderately positive, although there is ample scope for further improvement and a risk for short-term turbulence once the ECB has finished its tests and reviews. What about the parade of other ’unions’ such as economic union, social union and political union? The macro-economic imbalances procedure (MIP) and possibly the ESRB have overcome the pre-crisis disregard of macro competitiveness. The three components of ‘economic union’ (single market, economic policy coordination and budgetary disciplines) have all been strengthened. The last two ‘unions’, on the other hand, would imply a fundamental change in the conferral of powers to the EU/ Eurozone, with drastic and possibly very serious long-run implications, including a break-up of the Union, if such proposals would be pushed through. The cure is worse than the disease. Whereas social union is perhaps easier to dismiss as a ‘misfit’ in the EU, the recent popularity of suggesting a ‘political union’ is seen as worrisome. Probably, nobody knows what a ‘political union’ is, or, at best, it is a highly elastic notion: it might be thought necessary for reasons of domestic economic reforms in EU countries, for a larger common budget, for some EU tax power, for (greater) risk pooling, for ‘symmetric’ macro-economic adjustment and for some ultimate control of the ECB in times of crisis. Taking each one of these arguments separately, a range of more typical EU solutions might be found without suggesting a ‘political union’. Just as ‘fiscal capacity’ was long an all-or-nothing taboo for shifting bank resolution to the EU level, now solved with a modest common Fund and carefully confined but centralised powers, the author suggests that other carefully targeted responses can be designed for the various aspects where seen as indispensable, including the political say of a lender-of-last-resort function of the ECB. Hence, neither a social nor a political union worthy of the name ought to be pursued. Yet, political legitimacy matters, both with national parliaments and the grassroots. National parliaments will have to play a larger role.

Regional business cycles and the emergence of sheltered economies in the southern periphery of Europe. Bruges European Economic Research (BEER) Papers 7/November 2006

Recent research has highlighted that in the last few years the evolution of regional disparities in many European states has become pro-cyclical. This represents a change with respect to the predominantly anti-cyclical pattern of the 1960s and 1970s. This paper addresses the question of whether and when this change has taken place in the southern periphery of Europe, before analyzing the factors that may have played a role in such a change. The analysis relies on a regional database that includes the evolution of the GDP per capita of NUTS II regions in five European countries (France, Greece, Italy, Portugal, and Spain) between 1980 and 2000. The results of the analysis support the hypothesis of a change towards a pro-cyclical evolution of regional disparities in the cases of Italy, Portugal, and Spain, but not in those of Greece and France. A relationship between these pro-cyclical patters and the emergence of less dynamic sheltered economies is also detected in peripheral regions. This lack of dynamism is related to the fact that numerous peripheral areas in southern Europe have become increasingly dependent on factors such as transfers or public investment and employment, and therefore are less exposed to changes in market conditions.

Focal points and fiscal discipline. ACES Cases No. 2013.2

Many studies suggest that balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Typically, this is explained as a result of a legal deterrence logic, in which the threat of judicial enforcement deters sovereigns from violating the rules. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on US states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

Living (dangerously) without a fiscal union. Bruegel Working Paper 2015/03

The euro area’s political contract requires member nations to rely principally on their own resources when confronted with severe economic distress. Since monetary policy is the same for all, national fiscal austerity is the default response to counter national fiscal stress. Moreover, the monetary policy was itself stodgy in countering the crisis, and banking-sector problems were allowed to fester. And it was considered inappropriate to impose losses on private sector creditors. Thus, the nature of the incomplete monetary union and the self-imposed taboos led deep and persistent fiscal austerity to become the norm. As a consequence, growth was hurt, which undermined the primary objective of lowering the debt burden. To prevent a meltdown, distressed nations were given official loans to repay private creditors. But the stress and instability continued and soon it became necessary to ease the repayment terms on official loans. When even that proved insufficient, the German-inspired fiscal austerity was combined with the deep pockets of the European Central Bank. The ECB’s safety net for insolvent or near-insolvent banks and sovereigns, in effect, substituted for the absent fiscal union and drew the central bank into the political process.

Growth for Europe – Is the Juncker Plan the answer? EPC Discussion Paper, 20 March 2015

Executive Summary. The euro area is still suffering from low growth and high unemployment. For the recovery to become a reality, there needs to be a balance between fiscal discipline, supply side improvements and actions aimed at stimulating demand and growth. Increasing investment, both private and public, are important components in overcoming the recession. This becomes especially clear when comparing investment dynamics during the crisis with pre-crisis levels. Total investment is still much lower than before the crisis and public investment is well below its pre-crisis peak as well. In late November 2014, European Commission President Jean-Claude Juncker submitted a long-awaited proposal for a European Investment Plan that aims to stimulate private investment. Apart from the creation of the new European Fund for Strategic Investment (EFSI), through which private investors will receive public guarantees, the investment plan also aims to provide project assistance and improve the Single Market by removing sector-specific or other financial barriers to investment. While generally perceived as a first positive step towards increasing private investment, some commentators have expressed reservations about the plan. These include, among others, the lack of fresh money for the initial contributions to EFSI. Since a substantial amount of these contributions is reshuffled from other places in the European budget, the question was raised whether EFSI can fund additional projects or just replicates investment projects that would have happened without the plan. Other criticism relates to the high estimate of the expected leverage ratio of 1:15, and to the risk that the plan will only have a limited impact on stressed economies. The Juncker Plan addresses private investment, but so far there really is no clear strategy to stimulate productive public investment on the European and national level. Countries with fiscal space are reluctant to engage in higher spending, while those willing and in need of it the most are restricted by the rules. Member States and the Commission should therefore discuss options for further improving the euro area's economic governance. In addition to urging countries with fiscal space to increase investing in national public goods, investment could be treated with budget flexibility. One could, for instance, upgrade the importance of public investment in the European Semester. Additional deficit granted for public investment purposes could be attached to certain Country-Specific Recommendations. Another solution would be to allow some form of budget flexibility, such as the formulation of a new Golden Rule for productive public investment becoming part of the Stability and Growth Pact's application. Besides relying on a larger amount of flexibility in the rules, the Financial Transaction Tax (FTT) could be another solution to fund investment in European public goods. It will also be necessary to overcome the mistrust among Member States that is preventing further action. The political bargain of stronger conditionality, such as through contractual arrangements, could improve the situation. Increased trust will also be an important condition for tackling long-reaching economic governance reforms such as the creation of a Fiscal Capacity, which could take the form of a macroeconomic shock insurance. Such a Fiscal Capacity could make a real difference in providing the necessary funding to maintain productive public investment, even in times of deep recessions. The proposals presented do not attempt to be conclusive, but shall rather be an input for a wider debate on how to increase growth and employment in Europe. The paper draws heavily on the discussion of a Workshop on Growth and Investment, which the European Policy Centre (EPC) hosted on 10 December 2014 under Chatham-House Rule, with a group of economists and representatives from the European institutions.

Europäische Integration aus historischer Erfahrung, Ein Zeitzeugengespräch mit Michael Gehler = European integration from a historical experience, A Discussion with Michael Gehler. ZEI Discussion Paper C227, 2015

From 1995 to 1999 Monika Wulf-Mathies served as EU commissioner responsible for regional and cohesion policy. She tells us the story of the EU Commission under President Jacques Santer with regard to the historical development of the preparation of the Economic and Monetary Union (EMU), the Union Treaty of Amsterdam (1999) and the EU-Eastern Enlargement. She touches also controversial aspects of the Santer Commission, which led to her collective demission in 1999. According to Wulf-Mathies the increase of EU's democracy deficit is result of an erosion process of the common institutions caused by the nation states which contributed to their weakness. The democratic substance of the union suffers because of the 'summarization' of the EU decision making processes. Monika Wulf-Mathies argues in favor of the community method, which needs revitalization. She proposes European democracy enforcement and transfers of the national budget und economy policies to EU bodies. This eyewitness talk offers an actual EU analysis as well as an assessment of the Santer Commission.

Eurodéputé: «Seconde chance» ou «Tremplin» – Comparaisons des trajectoires politiques de candidats PSE et PPE aux élections européennes de 2014 en France et en Suède. = MEP: "Second Chance" or "Jump" - comparisons of PSE candidates and political trajectories EPP in European elections 2014 in France and Sweden. Bruges Political Research Paper No. 40, February 2015

Le mandat d’eurodéputé est conçu différemment dans chaque état membre. Cet article teste la validité des cultures politiques inclusive et exclusive, créées pour l’analyse des sélections des candidats français et suédois et leur conception du mandat européen. Leur sélection demeure un monopole partisan national où l’adhésion à un parti et la professionnalisation politique priment. La distinction apparait dans le degré d’ouverture de la sélection et la conception de la fonction d’eurodéputé et du Parlement européen. Les conclusions valident l’approche créée, montrant un déplacement du curseur le long des continuums formés par les cultures inclusive et exclusive. La France, «exclusive», reste centrée sur Paris et des élections ayant des conséquences sur le pouvoir exécutif. La Suède est plus inclusive tant dans les profils des candidats que dans les processus qui les intègrent aux listes et dans la façon de concevoir le rôle des MEP et du Parlement européen. Cet article se fonde sur un mémoire de Master: E. Cazenave, Eurodéputé: «Seconde chance» ou «Tremplin»? Comparaison des trajectoires politiques de candidats PPE et PSE aux élections européennes de 2014 en France et en Suède, Bruges, Collège d’Europe, 2014