Federico Di Dario, Ph.D. Candidate in International Perspectives in Corporate Governance and Public Administration at University of Teramo, Faculty of Political Science.

1. Old Asymmetries: Is more economic integration the answer?

The Economic and Monetary Union (EMU) is characterized by an asymmetrical design: on the one side, monetary policy is conducted at a supranational level, while on the other, economic policy is managed by national authorities[1]. This asymmetry showed all its limits during the euro crisis and it is perceived as the main threat to EMU’s future. The development of a budgetary capacity to overcome the economic crisis and asymmetrical shocks within a federal political system would be the best solution to the problem of asymmetry. Nevertheless, there are overwhelming legal and political constrains to fiscal integration[2]. Fiscal integration has different meanings in different Member States. While in some Southern countries economic integration means the development of a union of solidarity, namely a transfer union within a federal system, in some Member States, such as Germany or The Netherlands, economic integration means the restoration of the union of stability enshrined in the principles laid down in the TFEU, namely sound public finances and monetary stability through the temporary mutualisation of national public debts. Amending EU primary law seems not only politically difficult but it could also lead to constitutional disputes. The development of a transfer union, having the promotion of jobs and growth as its main objectives, might be perceived as the end of the union of stability by the German Federal Constitutional Court, for example[3]. On the other hand, deploying a debt redemption fund to restore the union’s stability might have disruptive effects on social and economic rights and even on national identities[4]. For these reasons, while fiscal federalism is certainly a noble political idea, nowadays a more pragmatic approach is needed to make EMU work. This article aims at advancing a proposal to promote symmetrical economic policies among Member States, within the boundaries of EU primary law. First, it shows that the economic side of the EMU is flawed by an asymmetrical architecture, as only restrictive fiscal policies can be prescribed at EU level while there is no binding tool for expansionary policies. This shortcoming can ease the emergence of macroeconomic imbalances and exacerbate existing ones. Second, it considers the support of expansionary policies de iure condito and de iure condendo, taking into account both the reform of EU economic governance as a consequence of the euro crisis and the principles and objectives of EU law. Finally, the article discusses incentivising Member States to implement expansionary policies.

2. Asymmetries within the Economic Union

The EU’s legal framework is based on fiscal discipline as the principal means to achieve monetary stability, the overarching principle of EMU. The conclusion of the Treaty on stability, coordination and governance in 2012[5], as well as the revision of the Stability and Growth Pact in 2011[6], have made the legal framework even more focused on fiscal discipline. However, in times of asymmetrical shocks, fiscal discipline could cause more harm than good. As a matter of fact, during the euro crisis all Member States, without distinction, conducted restrictive fiscal policies, including Member States with current account surpluses. However, indiscriminate austerity policies have on the one hand not reduced macroeconomic imbalances between Member States, and on the other led the euro area to economic stagnation (low growth and low inflation)[7]. Even the European Commission, which at the beginning of the crisis was depicted as one of the main advocates of austerity and as “an agent representing the interests of the creditor countries”[8], is now re-considering the issue. At the start of the 2017 annual cycle of the European Semester of economic policy coordination, the Commission stressed the need for an expansionary fiscal policy by “those who have fiscal space”. According to the Commission, a positive fiscal stance in the euro area as a whole would boost growth and would help lower the euro area’s current account surplus with the rest of the world[9]. In outlining the new strategy, the Commission also noticed that, while there are rules “essentially designed to prevent excessive levels of deficit and government debt”, expansionary policies can only be recommended not enforced. This is described as “an asymmetry of the EU fiscal framework: the rules can proscribe high deficits (also to avoid high debt) but they can only prescribe the reduction of budgetary surpluses, without imposing it”[10].

3. What is to be done?

The support of expansionary policies can be considered de iure condito and de iure condendo. In the current framework, it is true that expansionary policies can be recommended mainly via the procedure laid down in art.121 TFEU. In particular, in order to ensure coordination of economic policies, the Council, after a proposal from the Commission and a discussion on the issue within the European Council, adopts the broad guidelines of the economic policies (BGEP). Then, the Council monitors periodically, through the multilateral surveillance procedure, the consistency of Member States’ economic policies with the BGEP. However, if a Member State fails to implement the BGEP, there is no sanction but the Council may, as extrema ratio, decide to publish a recommendation addressed to the Member State concerned.

A more effective, although indirect, way to promote expansionary policies, could be the enforcement of the Macroeconomic Imbalance Procedure (MIP). The MIP was introduced during the crisis for all EU Member States[11] with a corrective arm for euro area Members[12]. The main aim of the MIP is to prevent the emergence of internal and external macroeconomic imbalances, with particular attention to current account disequilibria among Member States. Theoretically, the main tool to lower current account surplus is increasing government spending, boosting domestic demand and reducing net exports. In other words, the reduction of current account surpluses may be achieved primarily by  means of an expansionary fiscal policy. However, once in force, the regulations on macroeconomic imbalances have produced poor outcomes. This is due to several reasons, among other things, related to the development of the MIP scoreboard by the European Commission (containing a sort of favor for current account surpluses). At any rate, the main paradox is that, while through the preventive arm of the Stability and Growth Pact a Member State is asked to reach the Medium-Term Objective (MTO), namely a budgetary position close to balance or in surplus, lowering macroeconomic imbalances could imply expansionary fiscal policies derogating from the MTO rule. This is the reason why the tools to support a positive fiscal stance are merely of soft law nature, as pointed out by the Commission, along with political pressure by Member States in deficit.

In a de iure condendo perspective, supporting expansionary policies requires the introduction of a secondary law framework with a new regulation or with amendments to existing ones. The main aim of the new framework would be to reconcile the aforementioned conundrum between the MTO rule and the need to lower current account surpluses.

A solution would be the provision of a waiver to the MTO rule as long as a correction of macroeconomic imbalances is needed. Moreover, the European Commission should be responsible for setting expansionary fiscal targets whilst the composition and quality of the fiscal stance can only be recommended, as the ultimate decision falls on the competence of the Member States.

Various legal considerations support the introduction of provisions to support expansionary fiscal policies while reducing macroeconomic disequilibria. First, as current account imbalances can lead to instability, the new overarching principle of financial stability could be used to help prevent new crises[13]. Second, persistent current account surpluses may jeopardise the proper functioning of both the EMU and the internal market as they can provoke disruptive phenomena, such as massive capital outflow, credit crunch, collapse of financial institutions and so on[14]. Third, art.119 TFEU considers the sustainability of balance of payments as a guiding principle of the EMU not only for Member States with derogation but even for euro area Member States[15]. Fourth, the general principles of EU law, such as solidarity and cooperation, require the sharing of burden of macroeconomic adjustment between creditors and debtors. One way to further enhance this last argument would be the introduction of bilateral conditionality if a Member State is experiencing financial distress and is subject to enhanced surveillance according to Regulation 472/2013[16]. In other words, when a Member State is facing a current account deficit and has to adopt a restrictive fiscal stance, Member States with current account surpluses should cooperate adopting internal policies to help lower the macroeconomic imbalance[17]. In this respect, it is worth noting that art.2, par.2, of Regulation 472/2013 already provides that the alert mechanism established by the MIP must be used to assess whether a Member State is threatened by serious difficulties[18]. Nothing prevents the Commission from assessing the position of Member States with persistent and substantial current account surpluses and, where appropriate, forcing them to enhanced surveillance.

4. A matter of Incentives

Incentivising expansionary fiscal policies could be problematic. EU economic governance is based on two kinds of sanctions: economic sanctions (mainly a non-interest bearing deposit or a fine) and market sanctions. While budgetary surveillance is based on the possibility to adopt an economic sanction[19], multilateral surveillance is based on financial market sanctions. Lacking a European economic government, the Delors Report predicted that capital markets would have exerted pressures on Member States to adopt sound policies, consistent with the broad guidelines of economic policies, adopted at a supranational level[20]. Both economic and market sanctions could be useless in incentivising a positive fiscal stance. As for economic sanctions, imposing a 0,1% GDP deposit to Member States in surplus, as provided by Regulation No.1174/2011[21], is likely to be ineffective. Running a current account surplus of more than 6% of GDP could be considered advantageous even if a sanction is imposed. With respect to market sanctions, the problem is that capital markets tend to reward, rather than punish, exporting countries even if they are Members of a monetary union. This is why German bonds have become a sort of reserve currency during the last crisis. A new framework to incentivise expansionary fiscal policies should therefore be based on other means. As the current account position is directly related to trade balance, the best solution would be to give national authorities of a deficit Member State the power to impose restrictions to the free movement of goods or capitals vis-à-vis the Member State in surplus. Although this would be the most effective mechanism to reduce macroeconomic imbalances, issues of compatibility with EU primary law would certainly be raised. A simpler option would be to set the amount of the sanction on the basis of the volume of the surplus in order to reach a point where running a current account surplus is no longer convenient[22].

5. Conclusions

Many proposals have been advanced, even by European institutions, to build a viable EMU in the long-run. However, as suggested by Keynes, “in the long run we are all dead”. If EMU has to survive, one should stop being obsessed by fiscal federalism and unlikely revisions of EU primary law. Simple proposals, without overturning the EU legal framework, are instead needed to reduce asymmetries within the Economic Union, correct macroeconomic imbalances and support expansionary policies, when needed. In the current framework, the European Commission’s approach, recommending a positive fiscal stance in the euro area, is to be welcomed. This article advances a modest proposal to reconcile the achievement of the MTO position with the correction of current account disequilibria and, indirectly, to support expansionary fiscal policies through secondary law revisions. It also supports the idea that creation of a system of bilateral conditionality to share the burden of macroeconomic adjustment would enhance cooperation and solidarity between Member States. The introduction of a system for supporting expansionary fiscal policies would be just a starting point, as looking both at EMU guiding principles and EU general principles, there is room for many improvements to reconcile monetary stability, economic growth and financial stability.



[1]See, inter alia, K. Lenaerts, EMU and the European Union’s Constitutional Framework, European Law Review, 2014, 753; A. Hinarejos, Fiscal Federalism in the European Union: Evolution and Future Choices for EMU, Common Market Law Review, 2013, 1621; A. Verdun An “Asymmetrical” Economic and Monetary Union in the EU: Perceptions of Monetary Authorities and Social Partners, Revue d’intégration européenne, 1996, 59.

[2]On the economic problems of federalism, see recently M. Wolf, Emmanuel Macron and the battle for the eurozone, FT, 2017.

[3]Since its Maastricht-Urteil, the BVerfG considers the failure to achieve a “Community based on stability” (Stabilititsgenzeinschaf) a potential basis for withdrawing from the European Community. See BvR 2134/92 & 2159/92, para.90. This view was upheld in the OMT preliminary reference to the CJEU of 2014 (BvR 2728/13) where the Court stated that: “The current integration programme designs the monetary union as a “community of stability”. As the Federal Constitutional Court has repeatedly emphasised […] this is the basis for the participation of the Federal Republic of Germany in the monetary union” (para.43). On the ‘Judicialization’ of the euro crisis see F. Fabbrini, Economic Governance in Europe Comparative Paradoxes and Constitutional Challenges, Oxford, 2016, 63.

[4]The legitimacy and accountability issues related to the establishment of a European debt redemption fund are discussed in the Full report of the expert group on a debt redemption fund and eurobills, 57.

[5]See Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (March 1-2, 2012), commonly cited as Fiscal Compact.

[6]See Council Regulation (EU) No.1177/2011 of 8 November 2011 amending Regulation (EC) No.1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure; Regulation (EU) No.1173/2011 of the European Parliament and of the Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area; Regulation (EU) No.1175/2011 of the European Parliament and of the Council of 16 November 2011 amending Council Regulation (EC) No.1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies.

[7]There has been much discussion in the economic literature on the ‘Japanification’ of the euro area. See P. Krugman, What’s the Matter With Europe?, NYT, 13 August 2014.

[8]P. De Grauwe, In Search of Symmetry in the Eurozone, CEPS Policy Brief No.268.

[9]For a description of the benefits of reducing German current account surplus, see B. Eichengreen, Is Germany Unbalanced or Unhinged?, Project Syndicate, 2017.

[10]See Commission’s Communication, Towards a Positive Fiscal Stance in the Euro Area, (COM(2016) 727 final), 2.

[11]Regulation (EU) No.1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances.

[12]Regulation (EU) No.1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area.

[13]On the increasing role of the principle of financial stability in the EU, cf. G. Lo Schiavo, The Role of Financial Stability in EU Law and Policy, Alphen aan den Rijn, 2017.

[14]It is worth noting that EU legislation already recognises the link between financial and banking sector crises and the need to preserve the functioning of the internal market. This is why art.114 TFEU is being used as a legal basis for post-crisis banking regulation. See, in particular, Regulation (EU) No.806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No.1093/2010 and the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No.806/2014 in order to establish a European Deposit Insurance Scheme (COM/2015/0586 final). The correlation between external imbalances and banking crises is widely discussed in the economic literature. See, G. L. Kaminsky, C. Reinhart, The twin crises: The causes of banking and balance-of-payments problems, American Economic Review, 1999, 473.

[15]Art.139 TFEU defines Member States with derogation as those “in respect of which the Council has not decided that they fulfil the necessary conditions for the adoption of the euro”. For these Member States art.143 TFEU provides a specific tool to solve balance of payments crises.

[16]See Regulation (EU) No.472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability.

[17]As opposed to what happened during the euro crisis, where the burden of the macroeconomic adjustment was just carried by deficit Member States (unilateral conditionality).


[19]The budgetary surveillance procedure is established under art.126 TFEU and specified by the ‘corrective’ arm of the Stability and Growth Pact. According to art.126 TFEU, if a Member State fails to reduce its excessive deficit, the Council may require to make a non-interest bearing deposit or impose a fine.

[20]In particular, see Committee for the Study of Economic and Monetary Union, Report on Economic and Monetary Union in the European Community, 17 April 1989, 15.

[21]See art.3, para.5, Regulation (EU) No.1174/2011.

[22]On the problem of sanctioning Member States running current account surpluses, cf. A. Steinbach, Economic Policy Coordination in the Euro Area, London & New York, 2014, 109; M. Moschella, Monitoring Macroeconomic Imbalances: Is EU Surveillance More Effective than IMF Surveillance?, Journal of Common Market Studies, 2014, 1283; D. Gros, M. Busse, The Macroeconomic Imbalance Procedure and Germany: When is a current account surplus an ‘imbalance’?, CEPS Policy Briefs, 13 November 2013, 1.

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