World Review | European Commission’s proposal for a new bureaucracy may widen EU rift

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European Commission’s proposal for a new bureaucracy may widen EU rift

European Commission’s proposal for a new bureaucracy may widen EU rift
European Commission President Jean-Claude Juncker’s attempt to tighten fiscal discipline means transferring still more power to ‘Eurocrats’ (source: dpa)

THE EUROPEAN Commission announced in October that it is on track to create a European Fiscal Board – a new agency tasked with helping member governments draft and manage their budgetary policies. At the same time, it asked a study group to examine the possibility of introducing a European guarantee on bank deposits in the eurozone, writes World Review expert Professor Enrico Colombatto.

The Commission also said it would soon present a proposal to replace the current national guarantees of bank deposits in the eurozone with a European guarantee. This would suggest that the ideological battle cry in Brussels continues to be integration and consolidation, rather than decentralisation and national fiscal responsibility.

Although these proposals look somewhat vague and are not entirely new, they provide an insight into the likely direction of future developments. The broad outlook is defined by three sets of issues that have shaped the activities of the European Commission and of the ECB during the latest economic crisis, some of which Brussels is now trying to address.

First, is a straightforward dispute over the direction of fiscal policy between politicians in the member states, who for simplicity’s sake can be labelled as the hawks (adherents of budget discipline) and the spendthrifts (proponents of disobeying the EU budget rules).

A second set of issues revolves around the EU’s efforts to win back legitimacy and popular support for the European ideal, whatever this might be. The third concerns a power struggle that has heightened tensions between the political elites of the member states and the high-ranking officials and technocrats of the EU apparatus in Brussels.

The European Commission’s proposal to move forward with the fiscal board addresses the first issue (the future direction of EU policy), while the deposit-guarantee proposal advances the second (restoring public confidence). However, unless the third issue – the struggle for power – is resolved, European policy making will continue to lose credibility and may actually contribute to worsening economic conditions on the continent. Let us examine each of these points in turn.

Spendthrift countries within the eurozone are still having trouble with their public finances. This applies to relatively fast-growing countries like Spain, where economic expansion in 2015 should reach 3.3 per cent, as it does to disappointing performers such as Italy and France, where growth should barely crack 1 per cent. Until now, the situation has been relatively manageable thanks to artificially low interest rates (Italy, for example, was recently able to issue short-term treasury bills bearing a negative yield).

But sooner or later, the ECB will have to cut back on its bond-buying and quantitative easing will come to an end. Brussels understands that it had better get ready. Currently, the most credible alternative to quantitative easing is the issuance of sovereign European bonds. These could replace – at least partially – current bonds issued by the national governments and could ultimately be guaranteed by giving the EU autonomous powers of taxation.

It could be argued that the EU has no need for an independent agency to monitor and evaluate fiscal discipline, since this job is already being done by the European Commission. However, matters would be different if the EU ultimately succeeds in obtaining discretionary taxing power. The fiscal board would evolve from a purely advisory body into one with at least a limited enforcement capacity.

Is this a plausible scenario? Much depends on what happens in the near future. As recent history shows, it is not at all obvious that the spendthrifts will consent to give up their fiscal sovereignty and the chance to convert financial negligence into a political bargaining chip. Following this line of reasoning, either the hawks give up on their plans for augmenting fiscal discipline or they look for support to the ultimate enforcer – the ECB.

For a more in-depth look at this subject with scenarios looking to future outcomes, go to our sister site: Geopolitical Information Service. Sign in for 3 Free Reports or Subscribe.

Professor Enrico Colombatto

ENRICO Colombatto is a professor of economics at the University of Turin, Italy. Professor Colombatto is also Director of Research, Institut de Recherches Economiques et Fiscales (IREF) in ...

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