Blog Post

The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

By: Date: June 24, 2019 Topic: European Macroeconomics & Governance

As mandated by EU leaders during the previous Euro Summit of December 2018, the Eurogroup met in inclusive format on June 13th to discuss the deepening of the EMU. The two main deliverables from the meeting were a term sheet outlining the main features of a Budgetary Instrument for Convergence and Competitiveness (BICC) and the revision of the ESM treaty text. The first impressions from economists were quick to arrive, especially on Twitter. We review them in this blog post.

Most economists’ reactions focused on the BICC. Although the creation of the BICC was agreed by the Eurogroup ministers, the exact workings of such an instrument are yet to be defined. While the instrument is meant to be operational in 2021, there is still no closure on issues such as governance, pre-allocations, distribution of funds across countries and co-financing rates. The types of eligible projects for funding are also still loosely defined. Ashoka Mody does not see this as a reason for criticism, as a euro-zone budget negotiation was attempted numerous times in the past, without an agreement.

ECB vice president Luís de Guindos, who was interviewed by Federico Fubini for Il Corriere della Sera, calls the agreements “a first step in the right direction” that should, regardless, “not be the steady state of the instrument”. Indeed, De Guindos suggests that the instrument “could grow [from its current emphasis on competitiveness] and have a very clear purpose – countercyclical stabilisation”. The key for achieving these steps, according to him, will be trust.

Henrik Enderlein sees the value of using “Eurozone funded demand side interventions” to alleviate cyclical and employment effects of reforms. The only caveat, in his view, is the lack scale to incentivise reforms, a concern shared by René Holtschi. No budget ceilings are specified in the term sheet. However, the information that the BICC will be financed through the Multiannual Financial Framework can be interpreted as a cap of around €17 billion over seven years, which amounts to 0.01% of euro-zone GDP.

Likewise, Wolfgang Munchau deems the size of the instrument too small to even justify a debate “about whether or not it should have a cyclical stabilisation function”. However, as Munchau points out, even this amount is “still too high for the most hawkish member countries – the Netherlands, Finland, Ireland, Latvia and Lithuania”.

Indeed, Jean Pisani-Ferry and Jeromin Zettelmeyer write for VoxEU that the agreement is essentially a compromise between those “who advocated a specific stabilisation budget for the euro area (…) and those who rejected the very principle of a euro area budget”. The agreement offers, in their view, a political victory for both sides. On substance, Pisani-Ferry and Zettelmeyer see the marginal step that the current agreement “leaves the door open for a more meaningful instrument in the future”.

Lucas Guttenberg calls this new instrument for the euro zone “a good symbolic gesture”, the real use of which remains to be seen. From the published details, Guttenberg highlights the “complete absence of any reference to an intergovernmental agreement”, which will limit the scalability of the instrument. The proposed new instrument, in Guntram Wolff’s view, resembles the EU budget’s structural funds but should be more strongly focussed on countries in fiscal difficulties. Guttenberg’s reading is that “as long as you bring a good reason, you will get the money”.

A central point of contention is the purpose of the instrument, with initial expectations of a stabilisation function left wanting. Silvia Merler draws a parallel between the term sheet published last week and a joint Franco-German paper from February aiming to establish a euro-zone budgetary instrument. In her view, that paper’s stress on structural reforms is indicative of a goal of “broad convergence of economic growth models towards those identified as the best performers”. The underlying premise being that structurally aligned economies imply a lower risk of asymmetric shocks.

The term sheet, in a likely fashion, does not mention stabilisation, focusing instead on convergence and competitiveness within the bloc. But while the focus is convergence, Merler notes that little attention is given to the convergence of programme countries’ economies towards “Northern standards”. The result, as she describes it, is “a badly executed hybrid” featuring “(i) a duplicate of the structural funds tool and (ii) a mild version of a macroeconomic adjustment programme”.

Shahin Vallée also criticises the agreement as no longer resembling what it initially set out to be: a euro-zone budget under the authority of its own executive body, controlled by the European Parliament. Vallée draws the chronology of the stabilisation instrument discussions and argues that the BICC lacks the scope and governance for macroeconomic stabilisation.

A few days before the Eurogroup meetings, Olivier Blanchard acknowledged on Project Syndicate that the need for a common euro-zone budget has become more pressing, but “would entail risk-sharing among the member states, which is a politically difficult issue.” Blanchard names two tools that could be used in this regard, with different degrees of political sensitivity: “either a coordination device through which each country commits to a larger, self-financed fiscal expansion, or, preferably (but more controversially) a common budget, funded by euro bonds, which can then be used to finance higher spending in each country, when and if needed”.

All in all, the life of BICC is just starting. Aside from deciding on the technical aspects – among which governance and financing will be of chief importance – the agreement will have to be made into EU law. For now, the documents of the discussion have been submitted to the President of the European Council and discussed on the Euro Summit of June 21st.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic
 

Blog Post

EU recovery plans should fund the COVID-19 battles to come; not be used to nurse old wounds

In its proposed Recovery Fund, the European Commission uses allocation criteria mainly linked to infection rates and past economic performance. To foster an efficient economic rebound post COVID-19 crisis, we propose instead to allocate funds through a forward-looking approach based on specific industrial and economic structure of EU regions.

By: Carlo Altomonte, Andrea Coali and Gianmarco Ottaviano Topic: European Macroeconomics & Governance Date: July 6, 2020
Read about event More on this topic
 

Past Event

Past Event

The Euro area after COVID-19 - a conversation with Mario Centeno

At this event we will welcome Mario Centeno to talk about his time as President of the Eurogroup and reflect on the future of the Euro area.

Speakers: Mário Centeno and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 1, 2020
Read article More on this topic More by this author
 

Blog Post

The EU’s recovery fund proposals: crisis relief with massive redistribution

Poorer European Union countries and those hardest hit economically by the COVID-19 crisis could obtain up to 15% of their GNI in grants and guarantees from the EU’s proposed recovery instruments. Yet the proposal would represent a net benefit for all EU countries, even if there is only a small positive economic impact over the long-term. The proposed very long-maturity loans would lead to non-negligible benefits, exceeding 1% of GDP for some countries.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 17, 2020
Read article
 

Blog Post

One last push is needed to improve the Just Transition Fund proposal

The European Parliament and the Council still have an opportunity to improve the Just Transition Fund by refocusing it on social support and basing fund allocations on more granular information that takes into account not only countries’ needs but also their green ambitions.

By: Aliénor Cameron, Grégory Claeys, Catarina Midões and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: June 11, 2020
Read article More on this topic More by this author
 

Blog Post

Three-quarters of Next Generation EU payments will have to wait until 2023

Because of hurdles in designing, approving and implementing European Union programmes, less than a quarter of the €438 billion in grants planned under the new EU recovery instruments is expected to be spent in the next two and a half years, when recovery needs will be greatest. Well-functioning financial markets can help bridge the gap between urgent spending needs and late-arriving EU disbursements, but more effort is needed to frontload EU payments.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 10, 2020
Read article Download PDF
 

Policy Contribution

Is the COVID-19 crisis an opportunity to boost the euro as a global currency?

The euro never challenged the US dollar, and its international status declined with the euro crisis. Faced with a US administration willing to use its hegemonic currency to extend its domestic policies beyond its borders, Europe is reflecting on how to promote it currency on the global stage to ensure its autonomy. But promoting a more prominent role for the euro is difficult and involves far-reaching changes to the fabric of the monetary union.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 5, 2020
Read article More on this topic More by this author
 

Blog Post

An uncompromising budget

Apart from decisive European Central Bank measures, the EU-wide response to the COVID crisis had been rather weak until the Commission put on the table a drastically new proposal: the creation of a new recovery facility, ‘Next Generation EU’, that would borrow money in the name of the EU to finance EU-wide expenditures. The changes to the proposed standard seven-year budget that primarily focuses on long-term structural issues are however generally small, and funding reductions are compensated by new funds from the recovery instrument, suggesting that an opportunity is missed to reform the EU budget.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: May 29, 2020
Read about event More on this topic
 

Past Event

Past Event

The new EU budget: from COVID-19 remedies to green goals

Can we rescue the economy after COVID-19 and reach the environmental goals?

Speakers: Zsolt Darvas, Maria Demertzis, Karolina Ekholm and Miguel Otero-Iglesias Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 29, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Rebooting Europe - a framework for post COVID-19 economic recovery

Mapping out the post COVID-19 recovery.

Speakers: Maria Demertzis, Giuseppe Porcaro, Simone Tagliapietra and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 15, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Post-Council commentary

Can the European leaders meeting at the Council come together for a comprehensive recovery package?

Speakers: Guntram B. Wolff, Maria Demertzis, André Sapir and Giuseppe Porcaro Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 24, 2020
Read article More on this topic More by this author
 

Blog Post

EU debt as insurance against catastrophic events in the euro area: the key questions and some answers

European Union debt can provide comprehensive insurance against the COVID-19 pandemic and can enable a macroeconomic response, even though EU debt is a liability for taxpayers in EU countries and therefore indirectly for national budgets. To establish it, countries will need to give up control over some spending and some revenues. To be politically sustainable, that control should not be intergovernmental but be grounded in EU institutions. The EU Treaty offers some possibilities, but treaty change might ultimately be necessary. Democratic legitimacy is at the core of the debate.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 22, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Did the Eurogroup save the day?

After its longest meeting ever, the Eurogroup reached an agreement yesterday evening. What does the agreement say? What does it mean in terms of the emergency reaction to the economic fallout of the COVID-19 pandemic? What does it mean, more broadly, for the future of Europe? This week, Giuseppe Porcaro is joined by Maria Demertzis, André Sapir and Guntram Wolff to discuss whether the Eurogroup can save the day.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: April 10, 2020
Load more posts