The idea that the euro area needs a common “fiscal capacity” has gained ground since the publication of the Van Rompuy report in 2012. Since then, a rich literature has emerged on the role and functions that this fiscal capacity should perform, and different modalities for fiscal risk-sharing mechanisms have been proposed and discussed. Too often, however, discussions on fiscal capacity pay little attention to politico-economic considerations shaping the prospects of European Monetary Union (EMU) reform. Some aspects should be taken into account when reflecting on a future fiscal capacity for the euro area.
Fiscal union is broader than fiscal capacity
Discussions on fiscal capacity came after the introduction of major reforms in the fiscal arrangements for the EMU. New financial assistance mechanisms have been created since 2010 to help those countries suffering tensions in the sovereign debt markets (culminating with the establishment of the permanent European Stability Mechanism), and the rules and procedures for fiscal discipline have been strengthened, both through a reform of the Stability and Growth Pact (SGP) and the establishment of a new Treaty on Stability, Coordination and Governance (TSCG, also known as Fiscal compact).
There is general consensus on the fact that these reforms do not suffice. However, not everybody believes that the right path is to further centralize fiscal powers (see for instance this recent article by Barry Eichengreen and Charles Wyplosz). Besides, the idea of pooling fiscal resources or transfer budgetary powers to the EU level is politically explosive in some countries. Thus, even if the establishment of a fiscal capacity has been endorsed in various EU official documents, there is a need to better explain, argue and justify the need for it. A fiscal capacity will only see the light if the majority of stakeholders and populations are convinced that a certain level of fiscal policy centralisation is necessary to guarantee the stability and resilience of the EMU.
