Political Integration and Fiscal Policy in the European Union

Philip Arestis and Malcolm Sawyer

The recent negotiations between the UK and the EU concluded with a series of decisions on the position of the UK within the EU (European Council, 2016). Following these decisions, whether the UK remains or leaves the EU will now be put to a referendum on June 23. Whatever the outcome of that referendum, the recent negotiations have implications for the future of the EU, and more perhaps for the Economic and Monetary Union.

The agreed document reaffirmed “the process of creating an ever closer union among the peoples of Europe,” but in effect recognized that “Treaty provisions also allow for the non-participation of one or more Member States in actions intended to further the objectives of the Union … Therefore, such processes make possible different paths of integration for different Member States, allowing those that want to deepen integration to move ahead.” This document also acknowledged that “in order to fulfill the Treaties’ objectives to establish an economic and monetary union whose currency is the euro, further deepening is needed.” We have long argued that monetary union without political union has a chequered history, and that steps in the direction of de facto political union will be required if the euro is to be consistent with economic prosperity.

Much attention was paid (at least within the UK) to changes in the way child benefits and tax credits were paid to those moving from one EU member country to another. And a much trumpeted, though probably rather ineffectual, part of the agreement relates to the ability of member states placing some limits on cross-border payment of benefits. “Free movement of workers within the Union is an integral part of the internal market. … However, the social security systems of the Member States, which Union law coordinates but does not harmonise, are diversely structured and this may in itself attract workers to certain Member States.” The UK’s stance in the negotiations could have been seen to raise the issue of the compatibility between the free movement of labour within the EU and the social security arrangements. But instead of seriously addressing that issue, minor changes in the way child benefit and tax credits calculated were made with likely negligible effects on the intentions of reducing movement of labour. One major step towards a more effective economic union would be the development of a EU-wide unemployment benefit system. Such a step would involve a move towards closer union and would aid the functioning of the labour market with mobility of labour across national borders.

In our December blog we examined the extent to which political integration would emerge for the euro area in terms of banking union, and here we continue that theme with respect to fiscal policy. As also stated in that blog post, a recent report of the European Commission (2015), called the Five Presidents’ report on “Completing Europe’s Economic and Monetary Union” by the year 2025, states the aim of “a genuine economic and monetary union,” which would gradually evolve towards “Economic, Financial and Fiscal Union.”

In terms of fiscal policy the Five Presidents’ report (European Commission, 2015) emphasises the importance of fiscal discipline, referring to “responsible budgetary policies.” In this sense, the report proposes the creation of a fiscal stabilisation function for the euro area. However, such function “should be developed within the framework of the European Union” (European Commission, 2015, p. 15). It is also suggested that the creation of a European Fiscal Board to conduct independent checks on the conduct of fiscal policy is important. However, this proposal “should not be conceived as a way to equalise incomes between Member States” (European Commission, 2015, p. 15).

It is thereby recommended that “Responsible national fiscal policies are therefore essential. They must perform a double function: guaranteeing that public debt is sustainable and ensuring that fiscal automatic stabilisers can operate to cushion country-specific economic shocks” (European Commission, 2015, p. 15); and that “The Stability and Growth Pact remains the anchor for fiscal stability and confidence in the respect of our fiscal rules” (European Commission, 2015, p. 18). It is difficult to disagree that there should be responsible national fiscal policies—but crucial here is what is meant by “responsible.” A policy which seeks to impose a common target on countries no matter what their differences are in terms of needs for public investment, current account position should be seen as irresponsible. Amongst countries which have signed to the fiscal compact many have not been able to achieve a budget surplus (though some such as Greece are running enormous structural budget surpluses). What would be responsible would be to use fiscal policy to achieve a high level of employment (how high has to depend on the productive capacity of the economy).

The Five Presidents’ Report recognises that “It is important to ensure also that the sum of national budget balances leads to an appropriate fiscal stance at the level of the euro area as a whole” (p. 14). And then that “There are many ways for a currency union to progress towards a Fiscal Union. Yet, while the degree to which currency unions have common budgetary instruments differ, all mature Monetary Union have put in place a common macroeconomic stabilization function to better deal with shocks that cannot be managed at the national level alone” (p. 14). These remarks do indicate the need for developments of co-ordination of fiscal policy and the emergence of some form of fiscal union which will involve moves towards a closer union.

References

European Commission (2015), Completing Europe’s Economic and Monetary Union, Report by J-C. Juncker, in Close Cooperation with D. Tusk, J.Dijsselbloem, M. Draghi and M. Schulz, Brussels, 22 June.

European Council (2016), ‘Decision of the Heads of State or Government Meeting within the European Council, concerning a new settlement for the United Kingdom within the European Union’, EUCO 1/16.

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