The Debate on Eurozone Fiscal Capacity

On December 2012, the then President of the European Council Herman Van Rompuy proposed in “Towards a Genuine Economic and Monetary Union†the creation of a budget for the eurozone. At this stage fiscal capacity was conceived of as a financial support to countries who had agreed to implement structural reforms as recommended by the European Commission. Later, fiscal capacity assumed different understandings, either as a true stabilisation mechanism against large asymmetric shocks, or as a fiscal backstop to the banking union, as a resolution fund common to eurozone countries. Some doubts can be raised about the fiscal capacity of the eurozone as a support for reform. Is it possible to restrict the commitment to making structural reforms to the eurozone countries only, given that the European Semester, which includes national reform programs, is a procedure for all Member States (MS) of the European Union? As regards the fiscal backstop, although completing the banking union is considered by some observers to be a priority that alone would be enough to stabilise the eurozone, for others a stabilisation component is still necessary, given the pro-cyclicality of financial markets in times of crisis. Macroeconomic stabilisation is therefore the most consistent form of fiscal capacity for the eurozone, for various reasons: the impossibility for a MS to resort to exchange rate devaluation; the limited scope of monetary policy beyond a certain level, through the management of the interest rate and unconventional monetary policies; the rules of fiscal consolidation that weigh on national budgets. […]