The long-term EU budget: size or flexibility? Bruegel Policy Contribution 2012/20, November 2012

The EU is in the process of negotiating its 2014-20 financial framework. Failure to reach an agreement would imply a delay in the preparation of the strategic plans each member state puts together to explain how it will use Structural and Cohesion Funds. Even if solutions are found – for example annual renewals of the budget based on the previous year's figures – there will be political and institutional costs. EU leaders have too often and too forcefully advocated the use of the EU budget for growth to be able to drop the idea without consequences. • The overwhelming attention paid to the size of the budget is misplaced. EU leaders should instead aim to make the EU budget more flexible, safeguard it from future political power struggles, and reinforce assessment of the impact of EU funded growth policies. • To improve flexibility a commitment device should be created that places the EU budget above continuous political disagreement. We suggest the creation of a European Growth Fund, on the basis of which the European Commission should be allowed to borrow on capital markets to anticipate pre-allocated EU expenditure, such as Structural and Cohesion Funds. Markets would thus be a factor in EU budget policymaking, with a potentially disciplining effect. Attaching conditionality to this type of disbursement appears legitimate, as capital delivered in this way is a form of assistance.

The known unknowns and the unknown unknowns of the EMU. Bruegel Policy Contribution 2012/18, October 2012

Extensive prior research on the economics of European monetary union highlighted some potential risks (the known unknowns) but overlooked others (the unknown unknowns). Asymmetries among participating countries, the potentially destabilising character of a one-size-fits all monetary policy, the weakness of adjustment mechanisms, the lack of incentives for fiscal discipline, the possibility of sovereign solvency crises and their adverse consequences were all known and understood. But policymakers often relied on a complacent reading of the evidence. • The potential for financial disruption was vastly underestimated. Economists generally did not consider, or underestimated, the possibility of balance of payment crises such as those experienced by southern European countries, or the risk of a feedback loop between banks and sovereigns. • Remedying EMU’s systemic deficiencies is on the policy agenda. Banking union would go a long way towards addressing the fault lines. The urgent question for economists is if it is going to be enough and, if not, what else should complement the ‘bare-bones’ EMU of Maastricht.

Smart choices for growth. Bruegel Policy Contribution 2012/21, November 2012

Recovery in Greece, Italy, Portugal and Spain is held back in part by structural barriers. Overcoming these requires structural reform and public investment. Given the limited availability of political and financial capital, prioritising reform efforts and spending is important, but difficult. The different success factors for individual sectors are complementary. Using the example of the high-tech industry, we make the case that only investing in one success factor (eg broadband infrastructure) without having a sufficient endowment of others (eg education) is unlikely to make the sector successful. One consequence of the complementarity of the different success factors is that public investment and reform efforts should be fine-tuned in order to match the endowment of other factors. This might imply an increase in efforts to tackle several structural barriers at the same time, but it might also imply reducing investment in less promising fields. This in turn requires strategic thinking about whether it is worthwhile pursuing development strategies that require investment in many success factors but that do not promise much success. Such a strategic approach to public investment and reform efforts might make the allocation of scarce public financial and political capital more efficient.

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.