Report on The need for a common fiscal policy in the eurozone


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Report on The need for a common fiscal policy in the eurozone

  1. 1. The need for a common fiscal policy in the eurozone - Julio M. Castillo REPORT ON THE NEED FOR A COMMON FISCAL POLICY IN THE EUROZONE This is a report about the progress of political science at European convergence in the economic and fiscal policy, including recommendations as the safest alternative to overcome the current economic crisis: the creation of new common institutions and mechanisms to all members of the eurozone countries in order to make joint decisions about economic control on the single currency, the euro, focusing on institutions, politicians and citizens, it is proposed a definition of what Europe is and means today and what should be tomorrow, with the purpose of overcoming this crisis and avoid new crisis in the future. eurozone, economic crisis, fiscal policy, european integration, European Union, Euro, European Central Bank (ECB) e-magazine SCOOP.IT/ECONOMICINTEGRATIONEUauthor portfolio TWITTER.COM/JULIOMCASTILLO report prepared for LINKEDIN.COM/JULIOMCASTILLOJULIO M. CASTILLO JULIOMATEOCASTILLO@GMAIL.COM
  2. 2. The need for a common fiscal policy in the eurozone - Julio M. CastilloThe need for a common fiscal policy in the eurozoneCrisis in Europe is a product of uncontrolled financial speculation with manymarkets, starting with the housing market and mortgages. The traditional methodsto control the macroeconomic variables, like monetary policies, have beenprovided by the states to the European Central Bank. All of this countries keepdifferent taxes and tax rates, with the same currency and the same monetarypolicy. In order to overcome the crisis, is really necessary to coordinate and unifyfiscal policies of the eurozone countries to prevent speculation of the countriesmost affected’s sovereign debt.Differences about fiscal and financial situation between the countries of theeurozone is the main of many reasons that make the exit of crisis in a big obstacle.An example: VAT, Value Added Tax, the main tax that funds the European Union, iscompletely different depending on the country of the eurozone that we are lookingat. This situation makes very difficult the possibility of joint action by all memberstates and EU institutions against market speculation, funding problems and theeconomic recession1 .As we look on this graphic2,since the creation of theeuro until the financial crisisin 2008, have opened majorcurrent account imbalancesamong member states.While Germany made toughstructural reforms afterreunification and increasedprice competitiveness oftheir exports through a dropin unit labor costs, in countries like Spain and Italy (which entered the euro with a
  3. 3. The need for a common fiscal policy in the eurozone - Julio M. Castillorelatively favorable exchange rate) both inflation and unit labor costs grew fasterthan those of Germany. Therefore, accumulating a progressive loss of pricecompetitiveness of its products would resulted in a growing current account deficit.Facts like these are what make all analysts and scholars to indicate the mistake inthe construction of the euro: the lack of a common economic policy and institutionsto direct in the eurozone. Especially detect it in times of crisis in which it isnecessary to take action together and seen as different countries have differentmechanisms, different taxes, different policies, ... despite having the samecurrency.In order to solve this situation, governments of different countries of the eurozoneand international institutions, like IMF, propose the creation of eurobonds debtinstruments of all euro countries to finance jointly 3. But according to experts4, it isn’ta complete solution for eurozone. We need more common institutions and morecommon policies in order to solve this crisis and avoid new crisis and economicproblems in the future.The survival of the European project today is summarized in a sequence of unions.It is believed that monetary union without a fiscal union is unsustainable. The unionrequires fiscal union and bank union. And above all, the most important thing,which is the political union, to ensure public support, legitimacy and democracy tocontinue directing the destinies of the European Union in the future, withoutprovoking addition to an economic crisis, a legitimation crisis to become a systemicand trust crisis.For all the above, experts5 propose the creation of a European Monetary Fund torespond to difficult situations like the current funding in the future. At the sametime, creating a stronger political union, which through various treaties between
  4. 4. The need for a common fiscal policy in the eurozone - Julio M. Castillostates, can reach linking economic and fiscal policies making them moregovernable together.In order to get it, in the heart of the European Commission, it was proposed directlyelecting the European Commission President at the 2014 EU elections, the sameposition now held a Belgian politician: Herman Van Rompuy.In conclusion, European Union, and specially the countries who have euro ascurrency, should moves towards a truly federal union, following the style of theUnited States.The crisis has shown that it is impossible to have the same currency without havingthe same institutions and even the same policies. The direction of the exit of thecrisis can not be imposed by any State, should be the result of consensus amongall of them, to secure the agreement of all and legitimacy of the process.It is therefore vitally important the creation of new common institutions and movetowards fiscal union that experts propose in order to ensure the future of the 500million people who live in the European Union, once again becoming the largestcontinent, father of Western civilization.REFERENCES.1LABEAGA AZCONA, José María. Repercusiones tributarias de la ampliación de la Unión Europea. Institutode Estudios Fiscales (2010)2 STEINBERG, Federico and MOLINA, Ignacio. THE NEW GOVERNMENT OF THE EURO ZONE: GERMANIDEAS, DIVERGENT INTERESTS AND COMMON INSTITUTIONS. REVISTA DE ECONOMÍA MUNDIAL 30, 2012,59-81.3 HOLLANDE, François. Program of the French Socialist Party government 2012.4 KRUGMAN, Paul. The conscience of a liberal. Blog in The New York Times, 2012. (Nobel prize of Economyin 2008 and professor of Economics and International Affairs at Princeton University)5SOLOW, Robert. Towards a Common Fiscal Policy: Relaunching the Eurozone Economies. Cournot Centre forEconomic Studios. Berlin (2009)