POLITICA ED ECONOMIA DELLA UE: VERSO UN’UNIONE FISCALE? MASSIMO BORDIGNON UNIVERSITÀ CATTOLICA DI MILANO PROLUSIONE ALLA PRIMA EDIZIONE DEL MASTER IN ECONOMIA PUBBLICA SCUOLA SUPERIORE DELL’ECONOMIA E DELLE FINANZE «EZIO VANONI» MILANO, MARZO 2012 Plan of the talk Overview Three facts: Economics Legitimacy Federations The EMU/ EU in face of the crisis Governance Policies Ways out Overview The EMU (and consequently the EU) faces a severe crisis This crisis is mainly institutional-political rather than economical poor governance and weak legitimacy; EMU countries have taken some important steps to address the crisis, but these are not enough to provide a long term workable solution; Overview The experience of other federations - successful monetary unions suggests that reforms to increase democratic legitimacy and strengthen federal structures are needed; Not a fully fledged Federal State, but a more thorough FISCAL UNION across EMU countries, with some amount of federal resources and supranational (not just intergovernmental) governance. Overview A Fiscal Union might imply some amount of stabilization transfers but does not need to be a transfer union; many existing federal countries are not; Creating a Fiscal Union across Euro countries will need a revision of the Treaties and likely a two tier Europe; sharing a currency it is not the same as sharing a market; The medium term alternative may be a breaking up of the Euro area (and then perhaps of the EU) for political more than economic reasons. Fact 1. EMU/EU has not lived up to its promises on economic grounds… Macro-economic indicators (GDP growth, productivity, employment, inflation..) have not been on average better in the EMU zone than in comparable areas in or outside Europe; Intra- EMU trade has not increased as expected (+15% rather than +50%), even because progress in common market integration has halted; Benefits from Euro have been unevenly distributed, with increasing divergence across countries (e.g. McKinsey, 2011: benefits= 3.6% Euro GDP; half to Germany) Fig. 1 Average rate of growth in GDP (1999-2012) Fig. 3 Average rate of growth in per capita GDP euro countries (1999-2010) Fact 1. EMU/EU has not lived up to its promises on economic grounds… Financial integration has deepened, but the process is now quickly reversing leading to segmentation of national financial markets, due to insufficient regulation at federal level no effect of either SGP or Lisbon Agenda on EU countries performance (Ioannu & Stracca (2011)); Behind this dismal performance, a basic governance problem: not enough surrender of national sovereignty either for sanctions (SGP) or for common policies (LA). “You scratch my back and I will scratch yours” policy… Fact 1. EMU/EU has not lived up to its promises on economic grounds… Still the Euro area is in better shape (both internally: public finance and externally: current account) than many other federations. There is not a problem of insufficient saving, but that saving in the North is no longer willing to finance the deficits of the South. Interest rates on government bonds 10 years duration 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 Germania Francia Malta Slovenia Irlanda Italia Olanda Slovacchia Grecia Cipro Austra Finlandia Spagna Lussemburgo Portogallo 1 g1 lu 10 ot t- 0 ge n1 -0 9 ap r 8 lu g0 07 ot t- 7 ge n0 -0 6 ap r 5 g0 lu 04 ot t- 4 ge n0 -0 3 ap r 2 g0 lu 01 ot t- ge n0 1 0.00 Unitary costs for labor (1998=100) 150 140 130 120 110 100 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 90 Germania Irlanda Grecia Spagna Italia Portogallo Debt and deficit (% GDP, 2011) Source: Japan, UK, Usa and Canada OECD Economic Outlook No. 90; EU 27 and Eu17, Eurostat and data refer to 2010 Fact 2. EMU/EU is losing popular support… Euro barometer data show a declining support for EU (only 50% thinks EU membership a good thing for her/his country…) and EURO (53% in favor..) But support for EURO larger than support for EU, and this is still true both in Germany (63% in favor) and in Greece (71%), although declining in many countries in the last six months of 2011; EU elections are “second order” (not on EU issues), with falling turnout. Only the elite (i.e. highly skilled voters) bother to vote. Support for euro Support for euro, the trend in 2011 Turnout at the European Elections (1979 – 2009) Fact 2. EMU/EU is losing.. Is this worrying? Majone-Moravesik: no. The EU is a technocratic structure, implementing Pareto improving reforms, with enough separation of powers. Democracy damaging. Hix-Follesdal: yes. Not enough political debate and EU policy produces winners and losers. Whatever we believe about the past, former position clearly wrong for future Euro countries. With “euro plus” common policy on sensitive political issues (taxes, labor, pensions..), not technocratic problems. Fact 3. What can we learn from other federations? Often said EU is not optimal “federation” and EMU is not OCA. But existing federations were not born as they are now. Federal structures emerged as a result of crises, conflicts, wars…(Bordo et als., 2011). E.g. The US. The current EU/EURO crisis is also an opportunity for institutional change. Large variance across federations, but two general lessons: Fact 3. What can we learn from other federations? Some forms of federal stabilization policy is implicit in any successful monetary union to cope with asymmetric regional shocks. Even in the US and in spite of labor mobility, flexible labor markets and financial integration, fed budget insures between 20-40% (depending on estimates) of regional shocks. This go through automatic stabilizers (i.e. federal income tax) and explicit transfers to support local government programs (inter state transfer= 2.3% GDP). Fact 3. What can we learn from other federations? But stabilization does not necessarily implies redistribution in the sense of permanent transfers to poor regions/states (e.g. Transfer Union). The US, Brazil, Argentina are not redistributive federations; Canada, Germany, Spain are (Rodden, 2010); This depends on the political-institutional structure; presidential and bicameral system with strong regional upper chamber less conductive to equalizing transfers. The EMU/EU and the crisis: governance “..we badly missed a governance structure since the launching of the Euro” H. Van Rompuy to the EP, February 2012 Lisbon Treaty: a dual decision method (Fabbrini, 2011). Supranational (EP, EC, Council) for single market policies; intergovernmental (European Council, Council) for EMU and other sensible policies (i.e. defense). The EMU crisis has been managed by countries, i.e. the German-France directory, with little or no role for federal structures such as EC and the EP. The EMU/EU and the crisis: governance This has led to delays in facing the crisis, resentment in other countries, endless bargaining, short termism in decisions as national political leaders answered to their own national electorate. The resulting uncertainty has deepened the crisis and made the solutions still unsatisfactory. Also, for constitutional and political reason, the ECB could not work fully as a lender of last resort (it did it only indirectly, through refinancing of the banking system and limited purchase of sovereign bonds). The EMU/EU and the crisis: policies The European semester (coordination of fiscal policy) Six Packs (Strengthening of SGP; reverse majority, greater role to Commission, even on macro-economic imbalances) Euro-plus pact (23) (political commitment on harmonizing policies (tax, pension, labor etc); peer review) Fiscal compact (2013; 26) B. Budget rules constitutionally enforced, debt brakes; ESM (2013) to take the place of EFSF, permanent system to support illiquid but solvent Euro countries. The EMU/EU policies: assessment On the plus side: increased coordination of national policies, not only fiscal, strengthening of fiscal surveillance; .. But.. Euro-plus just a political commitment, not truly surrender of sovereignty by countries, same limitation than Lisbon agenda; Balanced budget rules make national fiscal policies strongly pro-cyclical (more than in the US, where BBR are “golden rules”); but differently from the US, without a federal budget, who will take care of asymmetric shocks? The EMU/EU policies: assessment ESM is a last resort measure, not a short term stabilization mechanism; it resembles bankruptcy rules for local governments existing in many federations (loss of sovereignty and debt restructuring in exchange of money), but with two important differences: ESM still managed by countries, almost with unanimity rule (Germany veto player in all circumstances); in other federations it is the federal gov, with federal money, that takes care of local govs financial problems; The EMU/EU policies: assessment Legitimacy problem; policies to be implemented at national level in countries receiving funds from ESM decided by technical bodies (EC, IMF, ECB), not by a federal parliament where interests of the receiving countries are represented. National public opinions may rebel. Ways out Short term Situation very fragile.. Any random episode may still trigger a financial crisis.. Increase federal regulation of the banking sector to avoid further segmentation -perhaps current crisis is a banking, not a balance of payment, crisis (Shin, 2012) Hope that in spite of the Fiscal Compact, countries in better shape keep up aggregate demand.. the EC can play a role stressing fiscal interdependence.. Ways out Longer term. Two speed Europe probably unavoidable; as euro countries further integrate, frictions with no euro countries bound to increase. To cope with the crisis Euro countries are already creating their own institutions (Euro summit) and treaties (Euro plus, Fiscal Compact). Better recognize it and revise the European treaties accordingly. Not sure existing Enhanced Cooperation Agreements enough to accommodate the needs of the Euro area. Ways out The legitimacy problem: several proposals. Merging the figure of the President of Europe with the President of the Commission and having it elected in pan-European elections (Berglof et, 2003; Hix, 2008) a possibility. Better a Presidential system to avoid the pitfalls of transfer union. An elected President would revive citizens interest in the EU and ignite a political dynamics leading to a strengthening of the European government vis a vis the member states. Ways out Following the direct election of President, introduce a Fiscal minister for the Euro area, accountable to both EP and the Council (Sapir et als, 2011), and in charge of the ESM; The fiscal minister could act faster and because of increased legitimacy could be given more intrusive powers on national governments (veto power on budget), addressing the moral hazard problem; But crucial that the Fiscal minister can rely on own sources (a EU tax base: common corporate income tax base? Carbon tax? Tobin Tax? Seigniorage?). Ways out The ESM should also be financed by accumulated payments by states more likely to use the ESM as originally proposed by Gros-Meyer (2010). In the medium run EU Budget not large enough to play a stabilization role; but the ESM under the new rules could help by providing temporary transfers to countries hit by asymmetric shock. Also needs a more flexible use on cohesion and structural funds. Fiscal compact will imply less room for investment at the national level; hence, a larger role must be played by the EU budget. Ways out The EU Budget could be divided in redistributive issues, financed by contributions from the states and EU public goods, (research, transport, energy) financed by own EU resources (Micossi, Salvemini, 2010). This part of the budget should be used to finance large European infrastructure projects (e.g. Ten-T, TenE), directly or in PPP. Issues of EU bonds? A stronger Agenda for growth is also what Europeans seem to be asking… What if we don’t do any of these? Status quo scenario. Mckinsey (2011): 2011-16, Eurozone GDP annual growth 0,6%, unemployment 11,5%, debt in core countries 89% of GDP, GIIPS 113%. Can the euro area survive such a scenario?