Curmi & Partners

Is fiscal integration back on the cards?

By David Curmi 

Recent newsflow from official sources as well as from within the corridors of Brussels suggests perhaps that the topic of fiscal integration within the EU is back on the cards.

It is no secret that President Macron of France has made the equipping of the euro area with its own eurozone budget a key ingredient of French policy towards the EU.  German support from Angela Merkel also appeared to be forthcoming when in May the German chancellor agreed with Mr Macron on the idea of a eurozone budget that is financed through some form of national contributions and possibly even domestic tax revenues.

Against a backdrop of potentially softening (but still positive) economic growth in the euro area, even the likes of Jens Weidmann, the president of the German Bundesbank has argued that this form of a euro area budget could be a positive measure that is possibly used as a counter cyclical tool.  It is true that currently European politics appears to be taken up with migration issues, the resurrection of nationalistic parties and in Angela Merkel’s case, a weakening of the old guard from a political perspective, but the idea of a euro area budget has interesting implications for the market – as well as for us, Mr Citizen. 

If there has been one lesson that has been learnt since the onset of the financial crisis in Europe, it has been that the ECB has single handedly tried desperately to stave off recession after recession through the slashing of interest rates and inflating its balance sheet through the QE program.  To some extent these actions have worked but the success so far has been muted.  Economic growth in the euro region has this year slowed once again to 0.4% qoq in both Q1 and Q2 2018from 0.7% for Q4 2017. Industrial output is also back into negative levels. The ECB’s ability to take more action to stimulate the economies is now indeed very limited. Structural deficiencies have remained untackled and there has been little more than a papering over of such problems.  If another crisis hits Europe there is precious little ammunition to use in order to fend off another recession.   And in such cases the types of nationalistic views we have seen re emerge will have an even stronger voice.  Risks of fragmentation rise.

A euro area budget designed to act as a countercyclical balancer could act to channel investment into those areas that need survival doses of oxygen and regeneration.  This will also take the pressure off the ECB to act alone in such situations and as fiscal policies take over from monetary ones, an easier transition to monetary policy normalisation can be seen. From a market perspective it could also deliver a much needed boost.  The history of the euro area is littered with periods of instability and question marks related to the staying power of the euro.  Without these risks, confidence levels in the European project will be bolstered as some of Europe’s vulnerabilities could be removed. European nations will move one step closer to a federal union.

By any stretch of imagination, this type of solution involves embarking on a long, windy and bumpy road, riddled with risks and resistance, most especially from the northern states of Europe.  It is therefore some way away from reality and possibly a scenario that will not be seen by this generation.

From a local perspective a full fiscal union probably makes little sense, currently.  Malta, despite being the smallest nation within Europe has carved its own little niche from which we earn our living.  Current economic growth is on a different binary to that of our European neighbours yet our economy could still be exposed to certain risks, both internal and external.  Is a European budget such a bad thing after all?

 

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.