feeble European economic recovery, many EU member states currently fnd themselves clamped in an increasingly tight vice. On one hand, they are forced to adopt harsh measures to avert the risk of collapse of further economic sectors; on the other, they seek to support workers who lost their jobs and, more generally, attempt to miti- gate the effects on those who have been hit the hardest by the crisis. Considering these budget problems that limit the abilities of countries to launch expan- sionary policies, the EU should play a decisive role to help the economic recovery through a Growth Pact. Such a policy would help to reduce the increasingly unbearable social tensions in many countries and, due to positive automatic effects on tax revenues, relax the burdens of national budgets. Foreign Policy Program Policy Brief A European Fund for Growth and Employment: A First Step Toward a Eurozone Budget by Alberto Majocchi 1744 R Street NW Washington, DC 20009 T 1 202 745 3950 F 1 202 265 1662 E info@gmfus.org June 2014 Economic Policy in the United States and Europe Following the 2008 Crisis Te deep crisis that ravaged the world economy afer the collapse of Lehman Brothers on September 15, 2008 began in the United States, but its foremost consequences were felt in Europe. Te continents banks were afected immediately by the situation in the United States, forcing European governments to intervene swifly to support the banking system through vast injections of public money. At the same time, European banks were forced to impose a credit squeeze on their customers. Businesses in turn reduced levels of productive activity, leading to contractions of house- hold incomes and further lowering demand of consumer goods. Te fnancial crisis had extended quickly to the real economy and involved, albeit in diferent ways, all the indus- trialized areas of the world. Faced with a global recession, coun- tries reacted strongly, overcoming their hesitations for large-scale public intervention, which had become rare since the times of Ronald Reagan and Margaret Tatcher. Instead, large stimulus packages were introduced to strengthen the real economy. But reactions varied in scope and size. Te response to the crisis was overall more forceful and more immediate in the United States than in Europe, where each country introduced indi- vidual measures and only the Euro- pean Central Bank was in a position to take comprehensive euro area-wide steps. Te weaker response of Euro- pean Union and eurozone member states was a result of self-reinforcing factors: frst, the decision-making process on economic policy in the EU is of a confederal nature. Joint policy reactions must thus be based on coor- dination slow and inefcient of decisions taken at the national level. 1
Furthermore, decisions regarding 1 According to Article 120 of the Treaty on the Function- ing of the European Union (TFEU), Member States shall conduct their economic policy with a view to contributing to the achievement of the objectives of the Union, as de- fned in Article 3 of the Treaty on European Union (TEU), and in the context of the broad guidelines referred to in Article 121(2) TFEU. The Member States and the Union shall act in accordance with the principle of an open market economy with free competition, favouring an eff- cient allocation of resources, and in compliance with the principles set out in Article 119. In Article 3 TEU, after having stated that the Unions aim is to promote peace, its values and the well-being of its peoples, it is added that the Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientifc and technological advance. Finally, and most importantly, Article 3(4) TEU states that the Union shall establish an economic and monetary union whose currency is the euro. Then, a monetary union is not enough and Europe should proceed toward a full economic union, in view of an ever closer union among the peoples of Europe (Article 1 TEU). Foreign Policy Program Policy Brief 2 It may be expedient for individual countries to seek to beneft from other countries efforts to stimulate their economy, as positive effects will spread and affect the whole area. fscal interventions must be taken unanimously, 2 leading to additional delays and necessitating an array of compro- mises to reach an agreement. Another factor impeding a more vigorous and speedy reac- tion in Europe concerns the potential for free riding in an interdependent economic area. In such an environment, it may be expedient for individual countries to seek to beneft from other countries eforts to stimulate their economy, as positive efects will spread and afect the whole area. Te Maastricht Treaty rules regarding the extent of public defcits further limited the fscal policy options of indi- vidual member states. Similarly, a joint intervention of the European Union was constrained by the limited size of the EU budget (about 1 percent of European GDP). Te European reaction was thus smaller than the U.S. response and had the limited objective of preventing the crisis from turning into a catastrophic recession. The Constraints on National Expansionary Policies Between the ongoing sovereign debt crisis and the feeble European economic recovery, many EU member states currently fnd themselves clamped in an increasingly tight vice. On one hand, they are forced to adopt harsh measures to avert the risk of collapse of further economic sectors; on the other, they seek to support workers who lost their jobs and, more generally, attempt to mitigate the efects on those who have been hit the hardest by the crisis. Te situation is further compounded by decreasing public fnances as a result of contracting revenues and the restrictions imposed by the Maastricht Treaty. Considering these budget problems that limit the abilities of countries to launch expansionary policies, the EU should play a decisive role to help the economic recovery through a Growth Pact. Such a policy would help to reduce the increasingly unbearable social tensions in many countries and, due to positive automatic efects on tax revenues, relax the burdens of national budgets. However, the EUs budget resources are limited. Furthermore, governments are seem- ingly preoccupied by discussions about the creation of a European Banking Union, and are thus less inclined to 2 Article 312(2) TFEU states: The Council, acting in accordance with a special legisla- tive procedure, shall unanimously and after consulting the European Parliament adopt a decision laying down the provisions relating to the system of own resources of the Union (Article 311 TFEU). And regarding the Multiannual Financial Framework limiting the development of expenditures, the Council shall act unanimously after obtaining the consent of the European Parliament. implement a more wide-ranging plan to bring Europe out of the crisis. Still, the experiences of some European countries over the last years have revealed the limits of austerity, 3 and the International Monetary Fund (IMF) has recently recog- nized 4 that fscal multiplier efects are generally larger than 1 and that fscal consolidation measures necessarily bring about defationary efects. 5
Given the interdependence of the internal market, there is no national solution to ending the crisis. To get out of this impasse, a new political initiative at the European level is thus urgently needed in order to launch a true eurozone recovery plan. 3 According to the Keynesian theory, an increase in public expenditure or a reduction in taxes will provide expansionary effects on GDP. Recently, a new school of thinking has expressed a different view, assuming that a reduction in expenditures or an increase in taxation will increase GDP since people expect that a reduced defcit will imply lower tax needs in the future, then more disposable income, and begin immediately to spend more (these are the presumed anti-Keynesian, expansionary effects of fscal consolida- tion). 4 IMF, World Economic Outlook, October 2012, pp. 41-43. See also O. Blanchard-D. Leigh, Growth Forecast Errors and Fiscal Multipliers, IMF Working Paper 13/1, January 2013. 5 In a recent paper, it has been underlined that the stronger the austerity programme, the deeper the decline in GDP. The estimated equation suggests that on average for every 1% increase in austerity, output declines by 1.4%. This implies that a 1% increase in austerity only leads to a 0.5% improvement in the budget balance. Put another way, in order to improve the budget balance by 1%, an austerity programme of at least 2% is necessary. Given our measure of the fscal multiplier of 1.4, this also implies a drop in GDP of 2.8%. Thus, the eurozone austerity programme imposed a very unfavourable trade-off for the periphery countries: in order to improve their government budget balance by 1% a sacrifce of 2.8% of GDP was necessary. As a matter of fact, the imposition of austerity programmes in the eurozone has fallen victim to the fallacy of composition. What works for one nation fails to work when every nation applies the same policies (). When all countries try to save more at the same time, each countrys attempt to do so makes it harder for the others to achieve their objectives. Then, it is high time that the Commission takes up its role of defending the interests of the debtor nations with the same vigour that it defends the interests of the creditors. See P. De Grauwe-Y.Ji, The Legacy of Austerity in the Eurozone, CEPS Commentary, October 4, 2014. Foreign Policy Program Policy Brief 3 Europe remains the weak point of the world economy. A European Fund for Growth and Employment According to IMF forecasts, the rate of growth within the euro area is still negative (-0.4 percent) in 2013 and will reach only 1 percent (1.1 percent according to the Euro- pean Commission) in 2014, while growth in the United States in the same periods will be 1.6 percent and 2.6 percent, respectively. Meanwhile, emerging economies will likely continue to see relatively high rates of growth, and in Japan, the expansionary monetary policy of the Abe government will bring the country out of a long period of stagnation. 6 Europe remains the weak point of the world economy. While the experience of this long crisis has shown that the current decision-making processes were sufcient to avoid the risk of an even deeper recession, the current coordination method of economic policy nonethe- less appears woefully inadequate to reach the objectives of the Europe 2020 strategy 7 and, in the short term, to guar- antee a full recovery of economic activity in the euro area and a renewed competitiveness of the European economy. Much has already been achieved with regards to gover- nance reform in the eurozone. Most of these reforms have thus far focused on achieving fnancial stability, with the signature of the Treaty on Stability, Coordination, and Governance (the Fiscal Compact) in March 2012, the Six Pack in December 2011, and the Two Packs entry into force in May 2013. 8 Furthermore, there is now a general consensus that every country is obliged to pay back its own debt accumulated in the past. Te appropriate measures are now in place to ensure that fnancial stability will be pursued by each member state within the eurozone under stringent European control. But fscal consolidation will be difcult to achieve if a recovery of the European economy is not rapidly forthcoming. 6 IMF, World Economic Outlook, Transitions and Tensions, October 2013, Table 1.1; European Commission, European Economic Forecasts Autumn 2013, European Economy, 7/2013. 7 European Commission, Europe 2020. A strategy for smart, sustainable and inclusive growth, COM(2010)2020, Brussels, 3 March 2010. 8 European Commission, Six-pack? Two-pack? Fiscal compact? A short guide to the new EU fscal governance, http://ec.europa.eu/economy_fnance/articles/gover- nance/2012-03-14_six_pack_en.htm. Structural reforms are urgently needed and unavoidable in indebted countries in order to improve productivity and to increase competitiveness. However, the positive results of these reforms will only be achieved in the medium- and long-term. In order to truly overcome the crisis, it is neces- sary to initiate a new phase of growth and to promote an increase in employment by linking a policy of fscal consol- idation in each member state with the immediate creation of a European Fund for Growth and Employment. Tis course of action would help member states continue along the path toward fscal consolidation, while simultaneously supporting growth and investments through a European initiative. Te main goals of the investments of the Fund should be to complete and upgrade the existing European infrastruc- ture network (energy, transport, and broad-band) and to promote technological innovation within a European economy that has now reached the technological frontier 9
and needs a new growth spurt to compete successfully on the world market. Huge investments from both the public and private sectors are needed to meet the infrastructure challenge. Te European Commissions preliminary esti- mates point to investment needs between 1.5 trillion and 2 trillion in the energy, transport, and ICT sectors. 550 billion will be needed for the implementation of the Trans- European Transport Network (TEN-T) program, of which 215 billion are needed for the removal of the main bottle- necks in the transport core network. In the energy sector, the expenditure needs amount to 400 billion for distribu- tion networks and smart grids, another 200 billion are needed for transmission networks and storage, as well as 500 billion to upgrade and build new generation capacity. Finally, between 180-270 billion in capital investment is required to bring wide and ultra-wide broad-band to all European households. Te Fund could immediately start to fnance related projects, while also developing strategies over the medium- term to improve the competitiveness of the European economy through investments in higher education, research, and technological innovation. A smaller part of the Funds capacity could be used to support structural reforms in member states that enter into arrangements of a contractual nature with EU institutions through limited, temporary, fexible, and targeted fnancial incentives the Convergence and Competitiveness Instrument suggested 9 D. Acemoglu, P. Aghion, F. Zilibotti, Distance to Frontier, Selection, and Economic Growth, Journal of the European Economic Association, pp. 37-74, March 2006. Foreign Policy Program Policy Brief 4 The driver of growth should become public investments, with a positive short-run impact on demand, but also on long-run growth through an increase in potential output. by the Commission in its Blueprint for a Deep and Genuine EMU. 10 A traditional policy based only on the support of consump- tion demand would be insufcient. A new phase of growth in the European economy should be initiated by promoting a sustainable development model. Te driver of growth should become public investments, with a positive short- run impact on demand, but also on long-run growth through an increase in potential output. It should be the declared goal of the Fund to improve European citizens quality of life and to raise the productivity of European frms. Tis should be achieved through increased spending on frontier research and higher education, by strength- ening the aforementioned infrastructural networks, as well as through the promotion of energy efciency and the use of renewable energy sources. Financing the Fund How should such a fund be fnanced? To answer this question, let us turn to the proposed European Financial Transaction Tax. On January 22, 2013, the Council adopted a decision authorizing 11 member states to proceed with the introduction of a Financial Transaction Tax through Enhanced Cooperation, and on February 14, 2013. the European Commission put forward a proposal for a Council Directive implementing Enhanced Cooperation in the area of Financial Transaction Tax (FTT). 11 It would 10 European Commission, A blueprint for a deep and genuine economic and monetary union. Launching a European Debate, COM(2012)777fnal, Brussels, November 28, 2012. 11 European Commission, Proposal for a Council Directive implementing enhanced cooperation in the area of fnancial transaction tax, Brussels, 14.2.2013, COM(2013) 71 fnal. make sense to devote the revenue of this tax directly to the European level, since European fnancial markets are unifed according to European rules. Te Commission projects that annual revenues from the FTT, if imple- mented only by the 11 countries (a number that could subsequently be extended to all of the eurozone member states), could amount to 30-35 billion. 12 Tese resources would allow for the launch of a euro project-bond issuance. Te European Investment Bank (EIB) could be entrusted with the analysis and evaluation of proposed projects, as well as with the pursuit of additional private sector support and potential funding by the EIB itself. In this way, at least 300-500 billion could be spent in three to fve years by the Fund for a multi-annual program of investments. 13 An additional resource could be guaranteed by the approval of the proposal of a Directive, recently put forward by the European Commission, related to the intro- duction of a carbon/energy tax, whose revenue has been estimated to amount to 39.6 billion. 14 If these resources are attributed, at least in part, to the new Fund, 15 it would be possible to launch a recovery plan amounting to invest- ments equal in the short- to medium-term to at least 1 percent of euro area GDP. From the Fund to a Eurozone Budget Te Fund does not represent the fnal endpoint of a polit- ical initiative. Instead, it represents an intermediate step, opening the way to a new era of reforms in the EU starting in the euro area that could culminate in an efective federal structure. It should thus be followed by an attempt to achieve agreement between all member states of the euro area on new resources that could be targeted to fnance a eurozone budget supplementary to the larger EU budget. If all member states of the euro area agree to the introduc- tion of the FTT and to assign the revenue to the European level, the Fund could efectively represent the genesis of a supplementary budget for the eurozone. According to a 12 Financial Transaction Tax under Enhanced Cooperation: Commission sets out the details, http://europe.eu/rapid-press-release_IP-13-115_en.htm. 13 A. Iozzo, For a European Sustainable Development Plan, Centre for Studies on Federalism, Discussion Paper 02, October 2011. 14 European Commission, Smarter energy taxation for the EU: proposal for a revision of the Energy Taxation Directive, Brussels, COM(2011) 168/3. 15 In view of the European Council of June 2013, four Italian federalist groups sent a Memorandum to all the European authorities asking for the attribution of the FTT revenue to a European Fund for Growth and Employment. See Centre for Studies on Federalism, Memorandum for the European Council on 27-28 June 2013, http://www.csfederalismo.it/index.php/en/activities/reports-and- contributions/2505-memorandum-per-il-consiglio-europeo-del-27-28-giugno-2013. Foreign Policy Program Policy Brief 5 As long as new resources and expenditures are attributed to the eurozone budget, the amount of taxes charged by member states should be reduced, so that fscal pressure on European taxpayers would remain unchanged. recent proposal, 16 Article 136 of the Treaty on the Func- tioning of the European Union (TFEU) could conceivably be designed to address the issue of the pooling of resources such as those deriving from the FTT and the creation of a body responsible for managing them. 17 Tis article, which introduces provisions specifc to member states whose currency is the euro, 18 has already served as the legal basis for the adoption of the treaty establishing the Euro- pean Stability Mechanism adding a new paragraph to the original text of the treaty. An adapted article would enable the eurozone states to pool the revenue from the FTT and to simultaneously entrust its management to an intergov- ernmental body, following the experience of the European Monetary Institute during the transition toward monetary union. Te ultimate goal would then be to open the way to the establishment and the functioning of a European Treasury. 19 Such a eurozone budget should support the growth of the European economy and, at the same time, absorb the efects of asymmetric shocks to the member states by holding a larger pool of resources than currently attrib- uted to the European Stability Mechanism. Afer the time needed to reach a political consensus, with the transition from the Fund to a eurozone budget, a European Trea- sury should be established to manage the budget under the democratic control of the European Council and the European Parliament. As long as new resources and expen- ditures are attributed to the eurozone budget, the amount of taxes charged by member states should be reduced, so that fscal pressure on European taxpayers would remain unchanged. At a later stage, savings achieved through the pooling of capabilities and resources, for instance in the area of defence policy, could further lower the tax burden on individual member states. 20 16 G. Rossolillo, A Budget for the Euro Area: The Road leading to the Decisive Federal Leap, The Federalist, 2013, http://www.thefederalist.eu/site/index.php?option=com_ content&view=article&id=1397&lang=en. 17 Secondary legislation could be used to introduce a rainy-day-fund (Article122. 136 and 352 TFEU) and a euro area budget could be established as part of the larger EU budget (C. Allard et al., Toward a Fiscal Union for the Euro Area, IMF Staff Discussion Note, September 2013, p. 24). 18 In order to ensure the proper functioning of economic and monetary union () the Council shall () adopt specifc measures () (a) to strengthen the coordination and surveillance of their budgetary discipline; (b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union. 19 B. Barthalay, Une nouvelle donne pour lEurope, Puissance Europe, Paris, 2012. This proposal has been taken up by M. Aglietta T. Brand, Un new deal pour lEurope. Croissance, euro, competitivit, Odile Jacob, Paris, 2013. 20 Some recent estimates indicate that total cost of non-Europe in the defense feld may be up to 120 billion a year. See V. Briani-G. Chevallard, The Costs of Non-Europe in the Defence Field, CSF-IAI, April 2013. No taxation without representation is a fundamental principle of democracy. Te Commission has correctly stated that the progress towards a deep and genuine EMU would over the medium term necessitate a structure akin to an EMU Treasury within the Commission to organise the shared policies undertaken with the common fscal capacity to the extent that they imply common resources and/or common borrowing. 21 Terefore, any new authority charged with managing joint resources, like those in a potential euro area budget, should be democratically controlled by the European Parliament and the Council. As Bruno Macaes writes, Any progress towards a genuine fscal union would have to include establishing a European treasury with the power to raise taxes, the power to decide on how to spend these monies, and the power to issue joint and several guaranteed euro bonds. A federal fscal union with a central authority having discretionary spending, taxing, and borrowing powers would decisively move the European Union towards a genuine political union a supranational state, calling for the corresponding democratic mechanisms necessary to ensure political legitimacy. 22
Similarly, a recent paper by the Directorate General of the French Treasury underlines that the creation of a common budget for the eurozone represents a medium term process 21 European Commission, A blueprint for a deep and genuine economic and monetary union. Launching a European Debate, COM(2012)777fnal, Brussels, November 28, 2012. 22 B. Macaes, Fiscal Union, Banking Union: Two Opposite Paths for Europe, The EuroFuture Project, The German Marshall Fund, May 2013, http://www.gmfus. org/archives/fscal-union-banking-union-two-opposite-paths-for-europe/. Foreign Policy Program Policy Brief 6 About the Author Alberto Majocchi is a full professor of public fnance at the Univer- sity of Pavia. He also teaches at the Universities of Venice, Varese, LIUC, and the Katholieke Universiteit Leuven, and has been a visiting professor at the Universities of Cambridge and York. From 1991 to 1993, he worked as a national expert for the European Commission in Brussels. From 1995 to 1996, he served as the economic advisor to the minister of the environment in Rome. He served as president of the Institute for Studies and Economic Analyses in Rome from 2003 until 2010. About GMF Te German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-proft organization through a gif from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has ofces in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and Tunis. GMF also has smaller representations in Bratislava, Turin, and Stockholm. that requires a step forward in the political integration to ensure democratic legitimacy of the tasks attributed to the European level. 23 However, at this point, we are unmistakably operating outside the perimeter of the Lisbon Treaty. If the European Fund for Growth and Employment represents the frst step toward a eurozone budget, new rules regarding the collec- tion of revenues and decisions regarding expenditures need to be established. Te reforms described above will open the way to the evolution of the EMU toward a full federa- tion, initially in the economic and monetary feld, but also eventually extending to other policy areas, including defense and foreign policy. 23 Ministre de lconomie et des Finances et Ministre du Commerce Extrieur - Direction gnrale du Trsor, Un budget pour la zone euro, Trsor-co Lettre, n 120, October 2013.