Analysis: Euro zone heads for econ coordination, no fiscal union

By Jan Strupczewski

BRUSSELS (BestGrowthStock) – Euro zone countries are likely to tighten economic policy coordination to help end the current sovereign debt crisis and avoid another one, but a fiscal union, that would complement the current monetary one, is unlikely.

The debate on how much euro zone members should coordinate economy policy was given fresh impetus by Spanish Prime Minister Jose Luis Rodriguez Zapatero on Thursday amid growing market concern about Madrid’s public finances.

“What Spain advocates is that if we have a single currency, it’s not enough just to have a central bank. It’s not enough to have a single monetary policy. We also need to have a common economic policy,” Zapatero said. “We need to have a much more integrated fiscal policy,” he added.

The fiscal rules of the European Union are written down in the Stability and Growth Pact, which underpins the euro.

The rules are under review to make them tougher and force more coordination on the fiscal and economic side and to prevent another debt crisis like the one triggered by Greece.

The European Central Bank has long stressed the need to strengthen the economic leg in Europe’s Economic and Monetary Union (EMU) project — the euro currency — but national interests of its 16 members have so far proved stronger.

The sovereign debt crisis has changed that — there is now more readiness among euro zone countries to accept some influence of fellow euro zone countries on national policymaking as reflected in the deal on a revision of EU budget rules.

It can be seen in the reform of the Stability and Growth Pact, which includes a range of steps to boost economic cooperation — from EU vetting of future national budget plans to monitoring competitiveness trends, macroeconomic imbalances and structural reforms.

The euro zone may even get the right to impose financial sanctions on countries which implement bad policies and do not respond to euro zone calls to change them.


A senior German source said that there was simply no alternative to more economic cooperation, even if it may sometimes be difficult to sell to the public.

However, it is not clear what Spain’s Zapatero meant by common economic policy and more integrated fiscal policy as interpretations of these terms differ depending on the country and the views are sometimes not compatible.

“Everybody agrees that the fact that we have a single monetary policy implies that we have to have more coordination of economic policies. It is when it comes to the specifics that people differ,” said Andre Sapir, economist at the Brussels-based Bruegel think tank.

One euro zone source said the likely underlying idea of the Spanish remark on more fiscal integration was a common euro zone bond, which would substantially lower the costs of borrowing for countries from the euro zone periphery.

The idea of such a bond is backed by the chairman of euro zone finance ministers Jean-Claude Juncker, but strongly opposed by Germany, which believes it would only make sense in a real political union.

For France, a closer economic union means a political counterbalance to the independent ECB. But Paris would not like to see others telling it how to run the economy.

To the Germans, closer economic cooperation would be a way to impose more responsible fiscal policies on others.

For most, more coordination means giving away more national sovereignty to unelected European Union institutions.

That is why a fiscal union is unlikely to ever materialize, because it would mean that national parliaments would have to give up their most fundamental power of setting taxes.

“There are currently no plans and no desire for a joint European fiscal policy,” German government Steffen Seibert said.

“A reformed Stability and Growth Pact already leads to higher cooperation on economic and financial policy,” he said.

(Additional reporting by Annika Breidthardt and Andreas Rinke in Berlin; Editing by Toby Chopra)

Analysis: Euro zone heads for econ coordination, no fiscal union