Few months ago, I wrote an article over the possibility for the Eurozone to really start thinking about a fiscal harmonization, especially following the departure of the UK.
After a while, here we are dealing again with this topic.
Why is that?
Does the word “Coronabond” tell you something? Of course, since with the spread of the Coronavirus the debate over a unification of fiscal power has been raging across the European Institutions. But first things first.
What does fiscal unification mean and how does it translate?
An obvious answer is “EUROBOND”. Many economists, but also politicians have asked for the creation of European bonds (also knowns as “stability bonds”) which consists mainly in governments bonds to be issued in euros jointly by the eurozone member states. The idea of both stability bonds and a uniform fiscal policy within the EU has always been subject of rumors. However, it is in 2009, during the 2009-2012 European sovereign debt crisis that this topic took a central role, so that the European Commission, headed by José Manuel Barroso, proposed for the very first time the EUROBOND introduction.
The basic idea is the creation of a common debt in the Eurozone, which is accompanied by a centralized management of member states’ policies. This translates in a system where the Commission would have the responsibility to harmonize the fiscal policies of the different countries but also, potentially, to decide about the destination of the funds among pensions, public investments and policies in favor of the labor market. From the Barroso’s proposal, the topic of a common financing tool periodically turned up again, with the intent of finding a compromise among countries which, as a matter of facts, has never been encountered. All these facts led to the current days where the term “coronabond” has been coined, in order to identify those debt securities to be issued for financing the measures to face the virus and its disastrous consequences on the national economies.
As for the economic crisis, another answer is represented by the possibility of having an unemployment subsidy at the European level. This solution represents a form of insurance-type fiscal policy. Basically, this would be an instrument to curb the drop in the aggregate demand when unemployment increases. These subsidies are anti-cyclical, meaning that they are activated only during periods of economic crisis, and have a high number of positive impacts, for example, they take effects quickly.
Following this line, the European Commission has proposed a new temporary instrument, the so-called SURE (Support to mitigate Unemployment Risks in an Emergency), allowing for Union financial assistance up to 100 billion, in the form of loans from the Union to those Member States resulted to be more affected by the crisis. Essentially it will provide financial assistance to Member States to address sudden increases in public expenditure for the preservation of employment. While this mechanism would be designed to enable the member states to increase public expenditure in order to protect jobs, it would also help small businesses and SMEs without new work, and so no revenues, to survive the crisis by alleviating financial liquidity difficulties.
It is clear that this tragic event has stirred things up and has revealed a number of issues, which in the past years have become a heated topic, especially after the financial crisis of 2009-2012, where it was obvious the lack of a common fiscal policy conducted at the European level. I wonder whether this moment we are living in will mark the beginning of a transformation movement for the EU or it will just be a flash in the pan which will leave the Union at the current status quo. However, one thing is sure, the European Union is walking on a testing ground and if it won’t be brave enough, it might be getting out weaker.