Towards a Eurozone Budget

by Daniela Schwarzer

One of the important debates ahead of the EU summit in December is the one on a potential future eurozone budget. There are many competing ideas around what to do with a potential eurozone budget and how to shape it. There are as many good reasons to equip the European Monetary Union with a federal budget. The most important ones are macro-economic.

Had the euro area been equipped with a budget that would have allowed macro-economic stabilisers to work on a pan-European level, the divergence between e.g. Spain or Ireland and the rest of the eurozone would probably never have become as important as it did in the run-up to the sovereign debt and banking crises. The mess we are in right now would be less serious. In particular as national budgetary policies have not provided a sufficient degree of macro-economic stabilisation as they should have, the case for a European mechanism is very strong.

There are several ways to equip the euro area or the EU with instruments of macro-economic stabilisation. With regard to the (stalling) negotiations of the EU-budget, an important opportunity is being missed. One useful measure would be to introduce own resources which have a stabilising function, for instance an EU corporate tax. On the expenditure side, investment spending should in the future be fine-tuned to match the business cycle of the recipient country, for instance by extending or speeding up the funding period. Structural funds could thus stabilise national or regional business cycles. The same logic could be applied to spending directed toward research and development, vocational training initiatives and life-long learning.

Moreover, in order to contribute to stabilising business cycles across regions and over time, the European Union should be able to build up reserves during economic upswings and spend these in economic downturns. This can be achieved without allowing the European Union to accumulate debt, if the system had been or will be introduced during a cyclical upswing. Such reserves could have complemented the five billion euros of discretionary
spending by the Commission during the severe economic recession in 2008-2009 had the system been put in place in the early years of the EMU.

Fourthly, an additional pillar of automatic stabilisation should be introduced, namely a European unemployment insurance scheme. Each country would continue to operate its own scheme, reflecting national preferences and traditions. A European unemployment insurance would not raise the overall contributions for employers and employees. It would only compensate for cyclical unemployment (and not for structural unemployment) as only those who have been regularly employed for a certain period prior to unemployment can receive payments.

All suggested measures are huge steps in terms of reforms; in particular the unemployment scheme would be an important step of integration, following a macro-economic case, but simultaneously strengthening the social pillar of the integration project. While the opportunity to introduce the suggested reforms to the EU budget is being missed in the course of the current negotiations, the introduction of a European unemployment scheme should be further investigated. This can be done for the euro zone only, or even only a selection of member states. The introduction of a European unemployment scheme would not require a Treaty revision, but it could be negotiated among the willing member governments. There is little excuse not to embark on this project now, given all the other disappointing results of negotiations with regard to the EU budget and ahead of the December summit.

Dr Daniela Schwarzer is Senior Associate at the Research Division European Integration at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP) in Berlin. From September 2012 till August 2013 she is Fritz Thyssen Fellow at the Weatherhead Centre of the University of Harvard.