When eurozone finance ministers meet in Brussels on Monday morning to discuss each other’s fiscal plans for the coming year, there will be a new element on the table compared to their last such gathering a year ago: the European Commission’s call for a positive fiscal stance for the eurozone as a whole.
Our recommendation has sparked strong and opposing reactions in different capitals. To understand the reasoning behind it, it is worth taking a step back.
The sovereign debt crisis laid bare the need for stronger economic policy coordination in the eurozone. So we created a procedure for finance ministers to discuss collectively their draft budgetary plans for the following year, before their final adoption by national parliaments, based on opinions prepared by the Commission. The idea was to create a moment to discuss eurozone-wide considerations which national authorities could take into account before the final adoption of each national budget.This system has now been in place for four years and works relatively well. But a discussion of national fiscal policies in isolation takes us only so far.
If we are serious about deepening the eurozone to strengthen its resilience, the first step must be to start acting collectively.
The eurozone’s aggregate fiscal stance during the crisis years of 2011-2013 was negative, as governments raised taxes and cut spending to rein in their ballooning deficits and regain the confidence of markets. Since 2014, it has been broadly neutral or very slightly expansionary. Crucially though, the eurozone fiscal stance has so far been the mere sum of the member states’ fiscal policies, rather than the outcome of a conscious decision or collective effort. It has been chance, not choice.
So the fact that the Commission is taking a position on what the eurozone fiscal stance should be is in itself an important step towards more effective economic governance.
In so doing, the Commission is acting as a eurozone finance minister would, and perhaps one day, will. But what do we mean by a positive fiscal stance? It combines two concepts. First, a fiscal expansion of up to 0.5% of GDP to firm up still fragile growth at a time of heightened global uncertainty, when ever greater numbers of our citizens feel left behind by the post-crisis recovery. And second, a better distribution of fiscal effort between the eurozone’s component parts. At present, we are in the paradoxical situation whereby those that do not have fiscal space wish to use it, while those that do have space do not want to use it. Overcoming this paradox would be in the interest of all.
Under Jean-Claude Juncker, the European Commission has proved itself to be able to apply the Stability and Growth Pact, the anchor of the eurozone’s fiscal solidity, in an intelligent manner.
We have made sure that we strike the right balance between pursuing fiscal consolidation in countries with high debt and deficit levels, and supporting growth. We have allowed temporary deviations from agreed fiscal adjustment paths to accommodate certain growth-enhancing reforms and public investments.
The Pact works – deficits have fallen from an average of 6% in 2011 to below 2% this year – but it is asymmetrical, with strong tools to push for consolidation but not expansion.
As we have made clear, those countries with still high deficit or debt levels should focus on respecting their commitments. Those running a surplus, on the other hand, should be encouraged to use those resources to support domestic demand, and in particular investment. This would be beneficial first and foremost for the economies concerned, but would also generate positive spillovers to the rest of the eurozone. Designing such a common fiscal stance is therefore a matter of collective responsibility and common interest.
The Commission is by no means going out on a limb in setting out the case for a positive fiscal stance. The IMF and the OECD have both called for those countries with fiscal space to use it to support demand.
The overriding policy priority at this time is to support growth. As underlined by the G20 leaders in September, that means using all policy tools – monetary, fiscal and structural – individually and collectively to that end. The eurozone must play its part in this global effort and it must do so in a way that is internally balanced, fair and coherent. That is the position that I will be defending in the Eurogroup.