Rules or capacity for the EU’s fiscal future? From Werner and McDougall to the present

Purpose - The COVID19 crisis has thrown wide open the debate on Europe’s Economic and Monetary Union’s (EMU) future. Next Generation EU (NGEU) has broken the stalemate over a central fiscal capacity. The open question is whether NGEU is a one-off or a first step. The suspension of the Stability and Growth Pact has given new urgency to the debate on reforming EMU’s fiscal rules. Design/methodology/approach - There is no debate as yet about how these two prospects relate to each other. This paper argues that a permanent fiscal capacity and revised rules should be seen as alternatives. Findings - This study makes two claims: first, a fiscal capacity renders a reformed pact unnecessary and second, that is an optimal solution politically. A fiscal capacity would provide an efficient asymmetric shock absorber and therefore reduce the need for pre-emptive action against negative cross-border externalities. It would also provide an abundant supply of an EU-wide safe asset around which to structure the EU’s financial system, thus rendering unnecessary the backstopping of member states' debts. Originality/value - This would restore democratic accountability while eliminating moral hazard and enforcement problems.