The euro area crisis exposed substantial structural flaws in the currency area's architecture. Improvements in the euro zone's economic governance, the introduction of a (limited) banking union, the European Central Bank’s (ECB) unconventional support, and, consequently, the substantially reduced fear of a country exiting the common currency have all contributed to overcoming the immediate risk of the euro area's collapse. But a number of fundamental issues still need to be addressed.
In the short term, an appropriate balance within the new governance system between sustainable public finance consolidation and Member States' public/social investment needs has to be found, but such flexibility should not lead to a repatriation of fiscal powers to the national level. The new European Commission should develop a new framework to assess the real returns to growth of public and social investment, which could open the path for more flexibility on deficits in future.
In close coordination with the European Parliament (EP), the Commission should also review the way the Country Specific Recommendations (CSRs) are drawn up. The CSRs specifically need a stronger focus on a smaller number of key priorities for each country, clearly focused on growth and going beyond mere expenditure cuts. There is also a need to foster political commitment by all of the Eurogroup to adhere to the new governance and to politically support it in public.
The absence of mechanisms to provide effective ex ante fiscal risk sharing in the euro zone needs to be addressed. This could be done through the establishment of a fiscal capacity. Euro area governments and EU institutions (including the EP) should intensify their efforts to set out the conditions, roadmap and outline features of such a fiscal capacity in the very near future. The Commission should make the construction of a fiscal capacity a priority in the new political cycle.
In addition to institutional/governance issues, the attention now needs to be directed even more strongly towards encouraging growth and thus, ultimately, jobs. To boost growth, there is a need to encourage private, public and social investment, at EU and at Member State level. The crucial step needed now is an ambitious European Investment Programme (EIP). The Commission should expedite the creation of such a Programme and ensure that the implementation of a EIP is compatible with the long term goals of a fiscal capacity, and that the possibility for a consolidation of the two measures in the future is given.
In the medium term, these actions are necessary but not sufficient. There continues to be a need to systemically address the flaws and gaps in the current governance framework, including the questionable effectiveness of EU policy in influencing national policies, the need to further deepen the banking union, a need to strengthen the social dimension of Economic and Monetary Union (EMU) and the creation of a fully-fledged fiscal union, including addressing the incomplete political legitimacy and accountability framework, and creating a better framework for the limited mutualisation of some public debt.
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