With Brexit looming over the health of the European economy and Trump imposing $7.5 billion tariffs on European imports to the United States, the Eurozone faces political challenges. Pitted along a spectrum ranging from pro-stimulus to pro-austerity positions, different politicians advocate for distinct economic futures for the Eurozone. The situation is further complicated by trade disputes, macroeconomic pressures, and a slowing European economy. The outcome of fiscal reform in the Eurozone will depend on who ends up controlling European economic and monetary politics.
To address the growing threat to the European economy, the European Union (EU) has confirmed Paolo Gentiloni as the new European Commissioner for Economic Affairs. In his confirmation hearing, Gentiloni presented a reform agenda for the Eurozone that focuses on common fiscal rules. The proposed reform agenda has made politicians throughout Europe and in the United States uneasy when it comes to addressing trade and taxation in the Eurozone.
In his role as Director General of Economic Affairs, his office has been designed as a watchdog over member states’ public finances. Yet, two diametrically opposed approaches can be found in the Eurozone: austerity is prevalent in northern EU member states, whereas stimulus spending is preferred by member states facing economic recession and growing debt in the South. Both sides of the debate are at a political stalemate on what direction EU fiscal policy should take. The current deadlock and differences in opinion in the past, does not bode well for accomplishing reforms of European fiscal policy in the future.
Is there a better chance with different with a new Commissioner in charge? To make good on his reform agenda, Gentiloni will have to address political resistance from conservative MEPs representing Northern European countries who want to maintain austerity policy and fiscal discipline throughout the Eurozone. Within EU institutions, the pro-austerity position is entrenched in the Eurogroup and has been expressed by leading EU officials. This has made compromise hard to accomplish. One-sided discourse favoring pro-austerity policies is creating more political and economic discontent among member states facing worsening economic strains and wanting a more flexible to deficit spending to boost growth and employment.
Gentiloni will have to build consensus in the European Commission, effectively squaring a circle, to achieve reforms. He will have to demonstrate the EU’s commitment to addressing fiscal concerns of member states, while also incorporating calls for greater fiscal flexibility. However, it is not only internal differences that must be reconciled. There are also external pressures that are forcing the EU’s hand. Tax cuts or tariffs in the United States and other foreign countries can create an uneven playing field for European companies, which might lead member states to put their national interests before a common reform agenda for the Eurozone. For instance, European governments blocked the EU’s tax initiative that would have given the EU Commission greater fiscal power to retain their own tax autonomy.
Despite opposition to radically changing the status quo, Gentiloni stated that he will continue to pursue a reform agenda that addresses topics such as a digital taxand climate change. This might antagonize the Trump administration and lead to increased economic sanctions on the EU. An escalated trade war with the United States would place greater pressure on the Stability and Growth Pact (SGP). If the trade conflict forces the Eurozone into a recession, the Pact calls on fiscally conservative countries to increase spending, at the same time, providing flexibility for EU member states to address their debt obligations. As such, changing economic circumstances rather than political consensus might end up challenging the conservative fiscal policy ideology dominant in the Eurozone.
Yet, purposeful consensus and coalition-building around a common set of principles would be preferable to blindly stumbling into a new era of fiscal policy. To create a common economic policy, Gentiloni has to reach a balance between the right amount of stimulus spending and fiscal responsibility. This will not be an easy task as Denmark, the Netherlands, and Sweden have demanded of the EU to implement stricter enforcement mechanisms to limit deficit spending while southern member states, with the support of France, have opposed any changes that will limit the flexibility in the Stability and Growth Pact. Gentiloni’s success in advancing with his reform agenda will depend on his ability to bridge divides and build consensus. Finding a workable middle ground will depend on the willingness of conservative politicians to accept more progressive fiscal policies and of left-of-center politicians make concessions regarding their spending commitments after a decade of austerity.
At the end of the day, Gentiloni has to convince both politicians and the wider public that, at the time of an economic downturn, austerity, which has been sold as being the necessary medicine, might actually not nurture the patient back to health and hinder growth. At the same time, he will have to reassure skeptics that fiscal discipline still has a role to play to guarantee the well-being of Eurozone economies and ensure their economic stability. Gentiloni faces a Herculean task, having to address the Eurozone’s economic stability, political imperatives and philosophical differences. Listening to the demands and taking the needs of member states seriously will be a necessary, if not sufficient, first step toward reaching the consensus required for achieving fiscal reform in the Eurozone.