After several years of expansion and job creation, eurozone economic growth has shifted into a lower gear.
Global trade conflicts, slowing growth in China and uncertainty over Brexit have all hurt manufacturing. Concern over the effects of the climate crisis, the future of multilateral trade and the effects of an aging population on our future productivity are also holding back investment and growth. As a result, the eurozone economy is set to grow by a little over 1 percent over the next two years, according to the European Commission’s latest fall economic forecast.
As policymakers consider their options, it would be a mistake to limit themselves to just short-term measures designed to stabilize the economy. This is the time to be thinking about ways to put the eurozone back on track for sustainable growth — taking into account the European Union’s climate goals.
As I prepare to leave my position as the commissioner for economic and financial affairs, I see four major policy priorities for the eurozone.
First, policymakers need to create growth-friendly policies that take into account the different needs of countries within the eurozone.
Highly indebted countries like Italy remain susceptible to sudden shifts of risk perception and have limited room for counter-cyclical policies.
Although no country in the common currency has been immune to the slowdown, not all have been impacted in the same way. Any new policy must take into account the differences in the needs and constraints among the members of the eurozone.
Highly indebted countries like Italy remain susceptible to sudden shifts of risk perception and have limited room for counter-cyclical policies. They should continue to work to reduce their debt levels, and the EU should pay close attention to the quality of their public finances. But if the economy worsens, these governments should be allowed to use automatic stabilizers to cushion the downswing.
Countries with relatively low debt levels, meanwhile, should use the low-interest rate environment to increase investment to boost potential growth and pave the way for a carbon-neutral economy.
Both the Netherlands and Germany have announced welcome fiscal boosts. Effective delivery will be essential. Germany needs to take concerted action at federal, regional and municipal levels to make an expansionary fiscal policy work. Finance Minister Olaf Scholz has rightly called on the Länder to help make this happen.
Our fiscal rules should encourage, not punish, productive investment.
Second, the EU should review the rules by which it ensures countries are pursuing sound public finances and coordinate their fiscal policies.
The Stability and Growth Pact provides valuable guidance to eurozone governments. But it has evident shortcomings: The debt rule, designed to keep countries from spending beyond their means, is too ambitious for countries that are trapped in a low-growth, low-inflation situation. Assessments of national budgets are too dependent on unobservable data and are frequently subject to large corrections.
Our fiscal rules should encourage, not punish, productive investment. I am not convinced by calls for a “golden rule” that would exempt certain public expenditure from our calculations. But why not strengthen incentives to contribute to the EU budget and to increase climate-related EU investment?
Third, EU governments should push forward with a common consolidated corporate tax base. The proposal, which is currently being blocked by a number of national capitals, would help make the EU’s single market more resilient and less dependent on external demand. It would also provide the ripe conditions for investment, innovation and job creation. The single market should be built on fair and efficient taxation. It should not make rich regions richer or increase our carbon footprint.
Fourth, the EU should complete its banking and capital markets unions. We urgently need to deliver on a European deposit insurance scheme and create a single rulebook to facilitate cross-border allocation of savings and reduce market fragmentation. We also need a powerful investment arm and an effective tax policy that mobilizes public and private capital for climate-friendly and sustainable investment. The eurozone also needs its own budget that supports national adjustments in case of large shocks, and a European unemployment (re-)insurance system that extends EU solidarity directly to workers.
Mario Draghi, the former head of the European Central Bank, was right to say that monetary policy alone can’t carry the burden of a weakened economy. The eurozone needs governments to step up and come together on smart fiscal policy.
If they act decisively together, the Eurogroup’s finance ministers and the new European Commission can help the eurozone weather the slowdown and relaunch its economy on a sustainable path.
Pierre Moscovici is European commissioner for economic and financial affairs, taxation and customs.