The single budgetary policy in the euro area – real vision or utopia?

With reference to coordination of budgetary policies in the EU (or, more precisely, within the euro area), there are some opposite views among economists and observers.

On the one hand, some authors argue that the present European framework for fiscal coordination has been practically completed and there is no need for further coordination of fiscal policies at the aggregate level. In their opinion, the SGP provides sufficient insurance against overly expansionary fiscal policies, which seems to be the most important issue for EMU.

Moreover, the SGP was designed to create room to let automatic stabilizers operate fully at the national level. Nonetheless, there might be some circumstances that justify and warrant common action, but this would be in some special cases only. Fiscal policy coordination could take place exclusively on an ad hoc basis. On the other hand, however, there are opinions that the need for coordination of national fiscal policies is still strong, because it arises from the ongoing need for a clear and well-defined aggregate fiscal policy stance. That could ensure its coherence with the aggregate stance of the single monetary policy.

In this context, it would be necessary to consider the potencial costs of uncertainty regarding the directions of the policy mix in the euro area if such a stance is not defined. At the moment there is no such an aggregate fiscal policy stance in the euro area as a whole.

The SGP is a tool to contain “free riding”, but it gives no guidance about the coherent policy mix. This is regarded as a major gap in the Europe’s institutional set-up. For that reason, some authors propose institutional reforms of European economic policy making with an objective to give aggregate fiscal policy a certain degree of coherence allowing the optimal and sustainable policy mix.