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.