Kristian Rouz — The European Central Bank (ECB) said France and Germany should reach an agreement to reform the Eurozone into a fiscal union, allowing Brussels to conduct a coordinated budget policy.
This, policymakers say, would allow for improved coordination between the ECB's monetary policies and the Eurozone's fiscal policies, making it easier to support economic growth.
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The ECB released a report last week suggesting "more inclusive" structural reforms in the Eurozone could bolster the bloc's growth potential by alleviating the long-standing North-South divide and enhancing the Eurozone's unity.
"Well-designed structural policies could yield substantial benefits for euro area citizens via a stronger and more inclusive growth in employment and incomes," ECB economists said.
The report was published on the heels of a momentous meeting between French President Emmanuel Macron and German Chancellor Angela Merkel, who reaffirmed their commitment to taking the European integration project to the next stage — a fiscal union.
First, a joint fiscal policy could address the challenges posed by the ECB's monetary stimulus. The ultra-low interest rate environment and the ECB's bond-buying program have required a tighter fiscal response from the national finance ministries during the post-crisis recovery of the past decade.
This means individual governments had to raise taxes and curb spending in order to avoid overheating of their economies amidst the massive influx of money from the ECB. The main problem has been the discrepancies between fiscal policies in the countries of the European North and South — whilst Germany has had no problem with fiscal tightening, similar policies have caused pain in Greece.
"Structural changes need to be country-specific and tailor-made to reflect the specific national starting conditions in terms of economic structures and institutions, as well as social preferences," ECB analysts wrote.
A unified Eurozone budget could apply a single standard of fiscal policy across the bloc, easing concerns of German taxpayers that they are funding social benefits payments in Greece.
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Second, a joint Eurozone fiscal policy would facilitate the funding of infrastructure projects across the bloc, making it economically homogenous and enabling an intensified business activity and exchange in goods and services.
This would drive economic expansion across the Eurozone and redistribute the benefits of GDP growth more equally amongst member states.
However, Merkel was initially skeptical of Macron's proposals on a fiscal union, which appeared to be "too radical" for her. Germany would contribute the most to the single Eurozone budget, whilst some German policymakers were worried that the lion's share of spending from the common budget would go to underperforming nations, such as Greece.
"Macron is like Sisyphus pushing his rock up," Isabelle Mateos y Lago of BlackRock said. "There's, finally, a potential for some progress, and a new crisis is threatening to sweep it all away."
Eventually, Merkel approved Macron's plan, endorsing a single Eurozone budget during the meeting in Meseberg, Germany, earlier this month.
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"There's a destructive mood in Europe these days," Enrico Letta, former Italian prime minister and now president of the think tank Institut Jacques Delors said. "The window for reforms is closing, because of the seven months lost negotiating a new German coalition, because of Austrian and Italian elections."
With the ECB and Merkel's support, Macron is now expected to take his fiscal proposals to Brussels and, quite possibly, tour the European capitals to rally additional support for his ambitious plan.