PERSPECTIVE Breaking the shackles of austerity? Using the EU budget to achieve macroeconomic stabilisation IAIN BEGG November 2012 Since the euro sovereign debt crisis erupted, Europe’s leaders have been struggling to find enduring solutions. Paradoxically, they have also pushed through extensive governance reforms and more are on the agenda, includ­ing the possibility of a fiscal union, albeit with no real consensus about what such a union would imply. As the EU ponders its Multi-annual Financial Framework (MFF) for the period 2014–20, it is striking that there has been virtually no discussion of whether or how the EU budget could be used to help resolve the crisis. In par­ticular, the scope for the EU’s finances to play a role in macroeconomic stabilisation – a role routinely under­taken by the highest level of government in other sys­tems – is barely mentioned. The MacDougall report offered a menu of options, start­ing with a minimal stabilisation capacity but going as far as a sizeable budget of up to 7% of GDP. 1 At that level, a stabilisation impact could have been substantial. Simi­larly, the Werner report offered a roadmap for monetary union which included proposals for a more limited stabili­sation capacity at the EU level. 2 Moreover, when the fi­nancial crisis of 2008 led to a sharp recession, there was a sizeable coordinated response both globally and in the EU. As part of the EU package, it was agreed that a mod­erate amount of fiscal stimulus should come directly from the EU budget, at least establishing the principle that the latter could act in this way. Can a future role in stabilisation be envisaged as part of a new budgetary deal? This Perspective explores how a 1. MacDougall, D.(1977): Report of the Study Group on the Role of Public Finance in European Integration. Brussels: European Commission. 2. Werner, P.(1970): Report to the Council and the Commission on the realisation by stages of Economic and Monetary Union in the Community, Bulletin of the European Communities, Supplement 11/1970. stabilisation capacity at EU level could be created without a substantial quasi-federal budget. Four main options suggest themselves:  A budget with more flexibility to vary spending in re­sponse to the economic cycle.  Using the limited EU resources to underwrite borrow­ing by Member States such that their ability to use fiscal policy for stabilisation purposes is enhanced.  Changes in the revenue raising capability of the EU.  A separate budgetary mechanism for the euro area (and, possibly, other Member States which choose to opt-in). The economic logic An argument for some form of central budget, whether it is used systematically for equalisation purposes or is confined to providing temporary relief, is that lower tiers of governments are less able to insure themselves against asymmetric shocks, whereas in a centralised tier of gov­ernment, the risks are pooled across countries/regions of the whole economic territory. 3 There is, though, always going to be an enduring tension between the stabilising and redistributive effects of central spending. 4 One of the recognised governance gaps in the EU, es­pecially the euro area, is the inability of the current 3. Boadway, R.(2004): The theory and practice of equalization, CESifo Economic Studies 50: 211–54. 4. Mélitz, J. and Vori, S.(1993): National insurance against unevenly dis­tributed shocks in a European monetary union, Recherches Economiques de Louvain 59.1/2, 81–104; Majocchi, A.(2003): Fiscal policy rules and the European constitution, The International Spectator 38.2, 27–41.