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The Euro and the Crisis pp 339–355Cite as

Toward a Closer Union in Europe: Elusive Mirage or Reality Within Grasp?

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Part of the book series: Financial and Monetary Policy Studies ((FMPS,volume 43))

Abstract

In the wake of the euro debt crisis, there have been multiple initiatives to repair the EU structure and governance, focused on the existing financial and fiscal framework. On the financial front, major steps—albeit still under construction—are taken toward unifying and strengthening banking regulation, supervision and resolution. By contrast, on the fiscal front, efforts in redesigning the existing framework so far have not been matched by progress toward unification. Likewise, practically no headway has been made in merging other key policy areas, such as defense, internal security, or external relations, as envisaged in the Treaty of Maastricht. Beyond taking inventory of what has been accomplished, the chapter explores the prospects and tasks for further political and fiscal integration—in line with well-known guiding principles, including subsidiarity and solidarity.

An earlier abridged version of this paper was presented at a Public Finance Dialogue seminar, in the German Federal Ministry of Finance, Berlin. The author is indebted to seminar participants and an anonymous referee for useful comments. But he alone is responsible for all views expressed.

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Notes

  1. 1.

    As illustrated by the crisis, the fiscal condition becomes imperative lacking an area-wide banking union consisting of effective banking supervision and uniform deposit insurance across member countries. Otherwise, impaired banks eventually need to be recapitalized directly or indirectly by the host government, compounding its debt burden.

  2. 2.

    For a comprehensive analysis of the application of the theory, see De Grauwe (2003), and for empirical evidence on whether the necessary conditions are met in the euro area, see Pasimeni (2014).

  3. 3.

    Chari and Kehoe (2009) formalized, in theoretical terms, the need for such fiscal rules in a monetary union.

  4. 4.

    This was the assessment of the EU fiscal rules by Buti and Giudice (2002) on the basis of seven of the eight criteria of good practice formulated in Kopits and Symansky (1998), namely, definition, transparency, adequacy, consistency, simplicity, flexibility, efficiency, and enforceability.

  5. 5.

    Criticisms that the Pact lacked an insurance device or that it was too rigid can be easily dismissed. Collective insurance proposed by Schelkle (2005) would have created added moral hazard and, as argued by Münchau (2016), it would have been inherently inconsistent among sovereign states. Contrary to the criticism of rigidity, leveled for example by Wyplosz (2017) among others, the binding deficit ceiling has been sufficiently flexible to accommodate even significant output shocks. Given tax progressivity, for most EU members, 1 % percent decline in GDP was estimated to lead to an automatic deterioration in the budget balance equivalent to roughly 0.5 % of GDP. Thus, it would take 6-percentage-point fall from trend GDP (that would anyway trigger a waiver under the Pact) to push the budget from balance to excess deficit.

  6. 6.

    For an analysis of the pre-crisis period and the stabilization programs, see Mayer (2012), Sinn (2014), and Kopits (2017).

  7. 7.

    For a detailed account, see Veron (2015).

  8. 8.

    For a critical assessment of the ongoing resolution process, see Sebastiao (2016). Difficulties encountered in the resolution of insolvent banks without government capital injections, under the present regime, stem from the failure of banks to disclose that it can be much riskier to hold bank bonds than bank deposits. As a last resort, after having exhausted the bail-in from shareholders and bondholders, the European Stability Mechanism (ESM) may recapitalize banks under a restructuring program, while the Single Resolution Fund (SRF) would be expected to coordinate financing by banks to this effect.

  9. 9.

    However, a timetable for implementing such a scheme has been proposed in the Five Presidents’ Report by Juncker and others (2015).

  10. 10.

    See the analysis and country cases in Kopits (2013).

  11. 11.

    See the proposals by Kopits (2014) and Andrle and others (2015).

  12. 12.

    European Commission (2013a, b) is intended to help navigate through the maze of rules, regulations, and practices, which currently underlie the SGP.

  13. 13.

    See, for example, Allard and others (2013).

  14. 14.

    See Escolano and others (2015) for a recent survey of practices in federal systems around the world.

  15. 15.

    These principles broadly overlap with the three basic branches or functions of government, popularized in the classic treatment by Musgrave (1959). From that perspective, the stabilization and redistribution functions should be assigned to the highest government level, while the allocation function can be decentralized to lower levels.

  16. 16.

    See Lamers and Schäuble (2014).

  17. 17.

    See Alesina, Angeloni, and Schucknecht (2005) on application of the subsidiarity principle in the EU.

  18. 18.

    Under their continued neutrality status—a relic of the cold war—Austria, Finland, Ireland, and Sweden so far have benefited from defense spending of neighboring EU member governments under the NATO umbrella.

  19. 19.

    See footnote 14.

  20. 20.

    See Juncker and others (2015).

  21. 21.

    Mijs and Schout (2015) evaluate critically these facilities under the flexibility criterion promoted by the European Parliament, attributable in part to the unwillingness of some member governments to commit additional resources to the EU budget on a permanent basis.

  22. 22.

    The EFSI is envisaged to finance €315 billion in investments from private sources (equivalent about 1½ % of GDP), leveraged with €21 billion from the EU budget and the EIB, over a 3-year period.

  23. 23.

    The governments of Germany and a few other countries resist launching a fiscal stimulus that would be procyclical, given full capacity utilization in their economies.

  24. 24.

    Giavazzi and Tabellini (2014), for example, propose discretionary fiscal stimulus through tax cuts, to be followed by eventual compensatory expenditure cuts, to be coordinated with the ECB’s expansionary monetary stance.

  25. 25.

    For a succinct discussion of tax assignment and country practices, see Norregaard (1997).

  26. 26.

    Given the lesser mobility of labor, there is no attempt to harmonize the bases or rates of payroll taxation, including in the form of social security contributions. Property taxes on real estate imposed on the least mobile base, are the least distortionary, and thus not a candidate for harmonization.

  27. 27.

    For a comprehensive treatment of EU tax harmonization, see the papers by Bovenberg, de la Fuente, Gardner, and Horne, in Kopits (1992).

  28. 28.

    See European Commission (2011).

  29. 29.

    See Fatica and Mourre (2016).

  30. 30.

    Bénássy-Quéré and others (2014) recommended the FAT (levied on profits and wages in the banking sector, equivalent to a sectoral VAT) as a complement to banking regulation, with its revenue yield earmarked to the SRF. Beyond a predetermined level, revenue could accrue to the central EU budget.

  31. 31.

    For a comprehensive review of the literature on the two theoretical strands of fiscal federalism, see Oates (2005).

  32. 32.

    In his Nobel lecture, Sargent (2012) provides a comprehensive economic analysis of the history of U.S. fiscal unification in an embryonic federal context, spanning the period between the 1790s and the 1840s.

  33. 33.

    In the United States, for example, state governments are constitutionally immune from bankruptcy under the 11th amendment. By contrast, local governments can avail themselves of Chap. 9 of the bankruptcy code.

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Author information

Authors and Affiliations

  1. Woodrow Wilson Center, Washington, DC, USA

    George Kopits

  2. Portuguese Public Finance Council, Lisbon, Portugal

    George Kopits

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  1. George Kopits
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Correspondence to George Kopits .

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Editors and Affiliations

  1. CIDEEFF - School of Law, University of Lisbon, Alameda da Universidade, Lisbon, Portugal

    Nazaré da Costa Cabral

  2. CIDEEFF - School of Law, University of Lisbon, Alameda da Universidade, Lisbon, Portugal

    José Renato Gonçalves

  3. CIDEEFF - School of Law, University of Lisbon, Alameda da Universidade, Lisbon, Portugal

    Nuno Cunha Rodrigues

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Kopits, G. (2017). Toward a Closer Union in Europe: Elusive Mirage or Reality Within Grasp?. In: da Costa Cabral, N., Gonçalves, J., Cunha Rodrigues, N. (eds) The Euro and the Crisis. Financial and Monetary Policy Studies, vol 43. Springer, Cham. https://doi.org/10.1007/978-3-319-45710-9_20

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