EU should finance common goods jointly, says ECB’s Knot
The European Union should centralise more of its budget spending, especially for common goods, as that would relieve the burden on more indebted countries and promote convergence, Dutch central bank chief Klaas Knot said on Thursday.
The EU has experimented with joint borrowing and spending in the aftermath of the pandemic but some nations, particularly Germany, resist calls for a closer fiscal union on fears that the German taxpayer could be forced to pick up the bill for perceived budget irresponsibility elsewhere.
Knot, the Chair of the Financial Stability Board, a global advisory group, argues that the entire bloc would benefit because joint spending lowers economic differences and provides a buffer during shocks.
“From a political economy perspective it also makes sense to ensure the provision of European common goods, such as climate, energy or defence, at the European level,” Knot said.
“This could serve as a true EU version of ‘gimme shelter’,” Knot said. “Hence, common fiscal spending has the potential not only to benefit individual countries, but the monetary union and its citizens as a whole.”
Knot brought up Italy as a case in point. The country has run more primary budget surpluses over the past 25 years than austere Netherlands but the country struggles with higher borrowing costs and lower growth, so the fiscal discipline failed to narrow the gap between these two.
Joint borrowing comes at a lower cost so removing some of the spending from national budgets would especially benefit countries with higher debt levels.
To ensure that countries like Italy would not simply waste such a relief on their budgets, the EU should also implement stricter rules on spending left at the national level.
“More fiscal space at the European level should therefore go hand in hand with less fiscal space at the national level,” Knot said. “The role of budget constraints to discipline fiscal policy is particularly relevant today, as inflation is still too high and government spending keeps adding to inflationary pressures.”
[Reuters]
