The Economist
Mario Draghi on the path to fiscal union in the euro zone

Fiscal union in the Eurozone: a must to meet today's challenges

Mario Draghi is calling for an European common fiscal action to confront common challenges, imported shocks (pandemic, energy crisis and Ukraine´s war) and supranational issues that will require vast investments in green and digital transition and defence. The road to a Fiscal Union now has different motivations than in the past, is not seeing as transfers from stronger countries to support weaker ones neither to face crises caused by unsound policies in particular countries. Now, EU Fiscal Union is needed because there is a serious risk that Europe underdelivers on its climate goals, fails to provide the security its citizens demand and loses its industrial base to regions that impose fewer constraints on themselves.

Main Highligths:

  • Common Challenges and goals need common fiscal action: Current European fiscal and state-aid rules limit the ability of countries to act independently.
  • New fiscal rules proposals at the EU need to be complemented by more spending powers to the center: Draghi is in favor of the new set of fiscal rules proposed by the Commission to avoid procyclicality. But in his view even if fully implemented, it would not fully resolve the trade-off between strict rules—which need to be automatic to be credible—and flexibility. Therefore, Europe needs to federalize some of the investment spending needed for today’s shared goals, which it will bring positive outcomes:
    - It could achieve a similar balance than the one that enjoys the United States, where an empowered federal government sits alongside largely inflexible fiscal rules for the states, which are mostly prohibited from running deficits.
    - National fiscal policies could then be more focused on reducing debt and building up buffers for bad times.
  • Consent from Eu citizens will be required: Such reforms would mean pooling more sovereignty and would therefore require new forms of representation and centralized decision-making, and thus the consent of European citizens in the form of a revision of EU treaties. According to Draghi today many citizens and governments are opposed to the loss of sovereignty, but alternatives are unrealistic as well.

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