Euro Zone Budget and its Effects on the European and Monetary Union (EMU) Integration

Abstract

The implemention of a monetary union in Europe, to take full benefit of the Single Market’s potential benefits, has not up till now delivered the expected outcomes. On the contrary, the euro area has been afflicted by many difficulties, including weak growth, unemployment, and inequality. Many blame the euro’s malfunctioning design, and especially its inability to promote economic convergence and provide amendment and stabilization mechanisms. The latter view prevailed when shaping the austerity policies imposed on the countries more affected by the financial and sovereign debt crises, intensifying an economic recession with dramatic social consequences. Citizens’ distrust in the European Union’s institutions grew, along with support for nationalistic political forces opposing the European integration project. Some of EMU’s needed reforms will both promote convergence, and help smooth economic activity and maintain citizens’ wellbeing when crises occur. The creation of an autonomous budget for the euro zone was mentioned in a European Commission discussion paper on the future of the EU. This is an eminently political matter, very sensitive to domestic public opinions. In fact, the existence of a budget for the euro zone, in recognition of the fact that this subset of EU countries has specific needs, distinct from those of other non-EMU members, would translate into a situation requiring the design of different budgets within the EU. Such issue is at the heart of the intense debate between holders of different views concerning the future of the EU and of the euro zone, especially in what concerns the question of which of these geometries will in the future be the engine for further economic and political integration in Europe. This paper assesses one of the main deficiencies of the euro’s governance model – lack of automatic stabilization – and discusses proposals to overcome it.