Last week, European key policymakers have missed the opportunity to take advantage of the crisis and build a stronger Europe through the implementation of robust European fiscal policies. In our previous policy proposal, we showed that having a monetary union without having such policies had been demonstrated by economics Nobel prizes and experience to be unsustainable. This indicates that the decision to increase the heft of the European rescue fund to €1 trillion will only temporarily relieve the pressure on member states’ debts. Indeed, two days after the crisis package was announced, markets were again spooked by the size of the debt that the Italian government has to roll over in the next 12 months (300bn euros). If Europe fails to make a step towards deeper fiscal integration in the coming weeks or months, history will repeat itself and new European emergency summits will have to be called.
But why exactly is fiscal integration the way out of the debt crisis? Today, isolated European states are in a deadlock. Over the past two years, concerns have arisen over their debt and deficit levels. Debt is the cumulated amount of money a state owes to lenders and on which it pays interests. Deficit is the imbalance between a state’s yearly spending and earnings. In order to be able to control its debt level, a state first needs to balance its spending and earnings. There are only two options to achieve that: increase earnings or decrease spending.
European states have recently launched efforts to close their deficits. For instance, countries such as the United Kingdom and France, have developed plans to decrease their number of civil servants in the coming years which will mechanically decrease spending. On top of this, very often, the overall tax level has been increased: tax cuts have been cancelled, new taxes launched, and other spending has been dramatically slashed. Unfortunately, these measures are currently being projected by rating agencies as insufficient to solve member states budgetary issues. The reason for that is quite simple: too slow growth. Indeed a declining growth both decreases earnings as tax income decreases and increases spending as unemployment allocations increase.
As a result of "austerity packages", governments have damaged business and consumer confidence. Boosting GDP growth would now require a stimulus package that European states would have to borrow money for. Yet, this would be prohibitively expensive because they already have too much debt. Member states are in a deadlock.
The way out of this deadlock is a stronger Europe. As detailed in our previous policy proposals, through the enforcement of fiscal policies, Europe, as one economic unit, can develop the capacity to raise money on financial markets. This capacity could be used to solve Europe’s debt crisis. It would enable Europe to take on part of member states’ debt and relieve the pressure on their shoulders in exchange of their binding commitment to respect budgetary sobriety. Additionally, Europe’s borrowing capacity should be used to launch a stimulus package boosting member states’ growth and therefore enabling them to quickly reach budgetary equilibrium. This stimulus package should encompass areas such as education and infrastructure projects and aim at making Europe a place of opportunities for the coming decade.
We therefore think that the way out of the debt crisis for Europe is to collect taxes to be able to borrow money and:
- Take on part of the debt of member states to put an end to the current debt crisis
- Impose a binding commitment to member states to respect budgetary sobriety/equilibrium
- Invest in a European stimulus package encompassing different areas of growth
Do you agree?