The European Union’s response to the current Covid-19 crisis has represented a Copernican turn from its approach to the financial and fiscal crisis of more than a decade ago. In any case, the policies adopted raise some additional questions to be solved: the revision of the fiscal rules, keeping in mind that the public debt levels accumulated during these months, the potential future role of the Next Generation EU, and the implementation of the basket of new own resources, designed for the repayment of EU common debt. All these debates are already underway. However, there is an additional issue that is passing under the radar and that must be added to the current discussions: the unsuccessful implementation of the Macroeconomic Imbalance Procedure (MIP) and its needed revision that is being delayed since 2019.
The reason for its failure is simple: a single instrument, the national budget, is subject to recommendations based not only on fiscal rules, in order to avoid free-rider behavior in the issuance of public debt, but also on norms to correct macroeconomic imbalances, to combat another kind of free-rider performance. Moreover, these recommendations could be, and indeed have been, contradictory, leaving Member states liable to sanctions upon failure to respond, using the national budget, to the Commission demands that are based on two parallel systems of supervision. Let’s see some examples.
From 2014 to the Covid-19 shock, the Commission had been sounding the alarm about the very large current account surpluses in some Member states, especially in Germany, due to its size and impact on the macroeconomic variables in the Eurozone. In the period 2013-19, Germany’s annual average surplus was 7.6% of GDP, reaching a maximum 8.1% in 2017. Without the euro framework, the Deutsche Mark would had appreciated, making exports more expensive and cheapening imports, which would had helped to correct the differential between investments and savings, strengthening internal demand.
However, in the Eurozone, simulating a free-rider effect, Germany was able to maintain its reduced unit labour costs, leading to a permanent current account imbalance. Some voices in Germany blamed the ECB expansionary monetary policy for this explosive situation, without realizing that the ECB takes decisions on the situation of the Eurozone as a whole and not on individual countries. As such, the strongest way for Germany to correct that current account imbalance was through an expansionary fiscal policy. However, during 2013-2019 period, German public debt remained on average around 69.9% of GDP, never dipping below 60% until the end of 2019 –mere months before the forthcoming of the pandemic impact. Therefore, Germany could not observe the MIP’s recommendations of reducing its current account imbalance while meeting the objectives of the fiscal rules.
We can see the same inconsistency in the cohabitation of fiscal rules and the supervision of macroeconomic imbalances in the case of Spain in the years prior to the financial crisis of 2008, although at that time, the Macroeconomic Imbalance Procedure was not yet formalized.
During the 2000-2007 period, Spain’s average yearly budgetary balance was a surplus of 1% of GDP and the public debt gradually decreased reaching a minimum of 35.8% of GDP in 2007. However, during the same period, the annual average current account deficit was 5.9% of GDP, reaching 9.4% in 2007. As such, the Commission should have issued a recommendation to the Spanish Government to increase the budgetary surplus in order to correct the existing current account deficit, among other possible measures. Of course, on theory, the fiscal surplus could have reached such level that would have led to the complete repayment of the Spanish public debt, and in turn eliminate the need to the issuance and circulation of a risk-free asset –the Spanish debt– which is necessary, among other things, for the implementation of monetary policy.
In fact, apart from these concrete examples, we should agree that national fiscal rules, thought for avoiding ‘free-rider’ behavior in the issuance of national public debt, do not internalize the effects of each national fiscal policy over the rest of Eurozone. Therefore, it is materially impossible to design any fiscal rules for applying on a Member State, which would be consistent with the framework of the Macroeconomic Imbalance Procedure, which cover, among other issues, the external sector. Moreover, we should expand the debate around the review of the fiscal rules taking into account this additional problem: externalities of the national fiscal policies.
For this reason, I do believe that an instrument similar to the ‘Next Generation EU’ should be made structural and permanent, not only for letting the Union enjoy a coherent global fiscal stance taking into account the economic positon on the cycle (especially for the Eurozone), but also as an element of macroeconomic imbalance correction. National fiscal rules, the current one or others new, are not enough to discipline budgetary stability on Member States and correct, at the same time, external macroeconomic unbalances. We need a European fiscal tool for closing the gap.
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