Whatever it Takes for a More Perfect Union
So what’s the big difference between the EMU and, say, the US—which is also a collection of individual states with very different economies, employment landscapes and, at times, rates of growth? A centralized federal budget which provides stability by allocating and redistributing money among members. You know you have a problem when the US federal budget is something to aspire to.
EMU members have their own national budgets, subject to the region’s Stability and Growth Pact (SGP) that is meant to ensure fiscal discipline and centralized oversight. This is where those pesky 3% deficit and 60% debt to GDP ratios are imposed—unless, of course, you’re Greece. But that’s for another time. The constraints this places on fiscal management along with monetary policy that does not cater to each nation can leave some members in a bind. This came to a head in the 2010 debt crisis, triggering the evolution of the European Stability Mechanism (ESM), a €700 billion intergovernmental lender designed to lend to members in financial distress.
So, member states with very different political, economic, and fiscal cycles have no control over their monetary policies. And while they can technically use fiscal policies to manage to their unique circumstances, they can really only do enough to make monetary stimulus useless. The ESM will, however, sell these struggling countries debt. Confused? You should be.
As Lagarde takes the helm at the ECB, the need for a common eurozone budget and fiscal union continue to garner support. French President Emmanuel Macron has become a big booster, and even Draghi’s on board, saying in a September interview, “To have a stronger EMU, we need a common Eurozone budget. Clearly the political debate on that still has a long way to go. But I am optimistic.”1 Coming just weeks after Lagarde was announced as his successor, Draghi’s comments could signal that he foresees a new dimension to the ECB’s involvement in Brussels.
Formerly Managing Director of the International Monetary Fund, Lagarde’s support for fiscal integration is well known. Last March, she gave a speech outlining what she perceived as the euro-area’s weaknesses and next steps, namely a modernized capital markets union, an improved banking union, and a move toward greater fiscal integration, starting with the creation of a central fiscal capacity.2 In a September 4 address to the European Parliament’s Economic and Monetary Affairs Committee she reiterated her plans.3
National budgets are one of the last instances of sovereignty existing within the bloc, so integration won’t come easy. However, the direction of travel is clear. If a meaningful fiscal alignment takes place in the eurozone, the moribund economy could be revived, but the political risks are high given how long the problem has been ignored. Now, with populism at the gates following a lost decade of growth politicians might just come around—if Lagarde can get them there.