Fiscal Policy of Europe and the Euro: Past, Present, and Future

Part 2

, by Chris Lisinski

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Fiscal Policy of Europe and the Euro: Past, Present, and Future

To the average observer, the financial makeup of the European Union can appear confusing and convoluted. There are a variety of intersecting treaties, pacts and policies, many of which work in tandem. Particularly given the rocky recent history of the EU, it is important to explore the impact of EU fiscal policy.

The Six-Pack, the Two-Pack and a Treaty

The EU created several administrative tools to adapt the SGP as a result of the financial crisis, including the “two-pack” and the “six-pack.”

The six-pack system, a bundle of six pieces of EU legislation, began in December 2011. Four of the six parts are designed primarily to improve financial surveillance by imposing more fines and restrictions on member nations who do not meet the budget requirements.

The other two aim to limit macroeconomic imbalances between member states. In other words, they survey member states for dangerously different economic climates and respond with European action if needed since one country’s finances can easily affect another’s.

It also defines debt more clearly so the EU can respond to the evolving financial problems within its member states.

Olli Rehn of The Telegraph praised the implementation of the six-pack as an important step for Europe.

“When this legislation enters into force later this year [2011], the EU will have in place a much stronger framework for preventing the economic mistakes that have cast a shadow over the recent past,” Rehn wrote. “…So, for example, when we detect symptoms of a property bubble, or weaknesses in the banking sector, or unbalanced patterns of trade and investment, we can act early to help solve the problem at the national level, rather than later when it has become a problem for the whole of Europe.”

The two-pack was put into place in May 2013 as a follow-up to the six-pack. It allows the Union to keep track of various economies better so it can prevent future crises.

There are two main components: one, it establishes a rule that EU nations must demonstrate commitment to the Union when they prepare their national budgets, and two, it organizes the process for surveillance and possible financial assistance if an EU member is struggling.

The two-pack works closely with the timeline of the European Semester, which was created in 2011. It mandates a timeline of when member states must publish their budgets and plans for review by the EU to ensure everyone is following the rules to protect one another.

A third important act in response to the crisis was the ratification of the Treaty on Stability, Coordination and Governance. The treaty was put in place on 1 January 2013, and it is an agreement by all members of the Eurozone – EU countries where the euro is the currency – to ensure their national budgets are balanced.

With the treaty, countries must not have an annual debt above 0.5% of their GDPs, must design plans to reduce their budget deficit in the future, and must inform other members of debt problems or major economic changes.

However, one criticism about this treaty is that it is too lenient on member states. It sets limits, but it does not enforce those limits strictly, so nations can ignore them and still receive financial assistance because the EU financial model is one of “mutualization” where debt is shared.

Others complain it is a passive solution that undermines the strength of the EU by setting only guidelines instead of clearly defined legislation written by a central power: “The European Commission has lost its ability to initiate legislation, being reduced to only setting goals and thresholds.”

The future of the euro

So what does the future hold? Growth forecasts have slowed down recently, though weaker countries such as Ireland and Greece are forecast to have some of the strongest growth.

Economists pose different opinions, some that the Eurozone is doomed and others that it could survive with proper management, including smaller bailouts and plans to boost growth.

One problem the euro faces as a single unified currency is the difference in inflation rates among members of the Eurozone. Larry Elliott, economics editor of The Guardian, explains that when the inflation rate is higher in one country, its exported goods become more expensive and it cannot adjust its exchange rates – since there is one currency – to remain competitive.

Some have called for more political integration as a solution, perhaps because even closer teamwork is needed to ensure stagnant members do not drag down other successful members.

And yet the hope of the euro still lives on. A single currency for the continent is still a progressive idea that would make Europe more unified. Plus, “in good times, this interdependence brings more prosperity.” The challenge is navigating through the risks of the bad times.

It has a negative air, but Graeme Wearden of The Guardian says, “The crisis is resting, not resolved.”

Future prosperity is possible. The Eurozone is built on hope for a unified continent, and this hope lives on, guarded valiantly by the EU and its proponents. More work is needed, however, to translate that excellence from a dream to a reality.

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