Draghi, economics lesson in America: “Debt, investments and fiscal union. The future of the EU has come to a crossroads”


The former prime minister and former ECB president, Mario Draghi, asks to accelerate EU integration no longer with a “technocratic” method as in the case of the birth of the euro which “has been successful” but through a “genuine political process where the final objective is explicit from the outset” and “supported by the voters in the form of a change of the European treaties”. Speaking at the Martin Feldstein Lecture in Cambridge (Machusetts), he underlined how this path “failed in the mid-2000s (with the no of the referendums in France and Holland on the constitution ed) but “now there is greater hope”.

Here is a summary of the Martin Feldstein Lecture 2023 given by former premier and former president of the European Central Bank, Mario Draghi, during the National Bureau of Economic Research summer conference in Cambridge, Machusetts.

The most important question we must ask ourselves is whether Europe can open up a different path towards fiscal union.

History teaches us that common budgets have rarely been created as appendages to monetary integration, but rather to guarantee specific objectives in the common interest. Until now, Europe has never had to face so many supranational objectives, which cannot be pursued by individual countries. We are experiencing a series of very important transitions that require huge common investments. The European Commission has set the investment requirement for the green transition at more than 600 billion a year between now and 2030. The public sector will have to finance a quarter to a fifth of this figure.

We are also experiencing a geopolitical transition whereby we can no longer rely on unfriendly countries for our basic supplies. This entails a considerable change in the direction of investments to increase production capacities at home or in partner countries.

Furthermore, throughout the history of the EU, its founding values ​​of peace, democracy and freedom have never been tested as they are now by the war in Ukraine. One of the first consequences of this is that we must start another transition and move towards a much stronger common European defence, if we intend to respect the military spending target of NATO countries equal to two per cent of GDP.

As it stands, however, the European institutional framework is not suited for these transitions, as a comparison with the United States highlights. In the US we can see a greater attention to the so-called “statesmanship”, in which federal spending, regulatory changes and tax incentives align to pursue the strategic objectives set. The Inflation Reduction Act, for example, will simultaneously accelerate green transition spending, attract foreign investment, and restructure supply chains in America’s favor.

Europe, by contrast, lacks an equivalent strategy that integrates EU-level spending, public subsidy directives and national tax plans, as the climate example demonstrates.

Once the Recovery Plan expires, there is no proposal for a federal replacement instrument to carry out much-needed climate spending. EU countries’ public aid regulations limit the ability of national authorities to actively pursue a green industrial policy.

In inaction, there is a serious risk of not meeting our climate objectives and, probably, of losing our basic industry to the benefit of regions with fewer constraints. This leaves room for two options.

First, it is possible to ease state aid rules and relax tax regulations to take on the burden of investment spending in full. Doing so, however, will create fragmentation, since countries with greater budgetary space will be able to spend more than others. As we learned from the Deauville Agreement, fragmentation makes no sense when the supranational goal is such that individual countries cannot achieve it on their own. Just as the euro cannot be stable if large parts of the monetary union break down, so climate change cannot be solved if one country reduces its carbon dioxide emissions faster than the others.

This means that we have only one option available, the second: seize the opportunity to redefine the EU, its fiscal structure and its decision-making process and make them more suited to the challenges we face.

The most important challenge for the euro area is that we are relying on national tax regulations to pursue many different objectives.

Given the crucial stabilizing role of national budgets, we need regulations that allow counter-cyclical policies to react to local shocks. We need to ensure the medium-term reliability of national fiscal policies in a post-pandemic environment characterized by super-indebtedness. Ensuring fiscal credibility necessarily implies that regulations are more automatic and that there is less discretion. Since it is impossible to design regulations to suit all future situations, increased automatism will always constrain governments’ ability to react to unforeseen shocks.

Likewise, acceptable regulations require adjustments over not too long time horizons. The kind of investment we need today, however, involves long-term spending commitments, many of which will continue well beyond the lifetimes of the governments that underwrite them. The European Commission has tried to resolve these compromises by proposing close attention to the spending rule linked to a country’s medium-term debt trajectory.

Since it constitutes a decentralization of powers at the centre, the normative automatism can only work if it is matched by a higher level of expenditure from the centre. This is what we can see in the United States, where the devolution of powers in the federal government makes possible largely inflexible fiscal rules for states.

The eurozone will probably never be able to replicate such a structure, given how much larger national budgets are compared to those of US states. There are good reasons, however, for adopting some elements of it.

Europe’s asymmetric fiscal space – where some countries are able to spend significantly more than others – is essentially wasted when it comes to shared goals such as climate and defence. If some countries can freely spend on these goals but others cannot, the impact of all spending will still be smaller, because no country will be able to achieve climate or military security.

More common debt issuance to finance this investment could in theory expand the collective fiscal space we have available. This means, at the very least, that we should ensure that the most indebted member states use the fiscal space to create common spending that improves their prospects.

One possibility, therefore, is to proceed – as we have done so far – with technocratic integration, making technical changes and hoping that political changes will follow soon. Ultimately, in the case of the euro, this approach worked and the EU came out stronger. The costs of that enterprise, however, were high, progress slow.

Another possibility consists in moving forward with a real political process, the purpose of which is clear from the beginning and is signed by all in the form of an amendment to the European Treaty. This road went nowhere in the mid-2000s, and policymakers have refrained from taking it again ever since. However, I believe that today there is more hope for success.

As the EU enlarges to include the Balkans and Ukraine, it will be imperative to reopen the Treaties to ensure we do not repeat the mistakes of the past by expanding our periphery without strengthening the centre.

The starting point for any future Treaty change will have to be the recognition of an ever-increasing number of shared objectives and the need to fund them together, which requires a different form of representativeness and centralized decision-making. At that point, it will become more realistic to move towards more automatic regulation.

I believe that today Europeans are more ready than twenty years ago to take this path, because in truth they only have three options available: paralysis, exit from the EU or integration.

It is clear from opinion polls that citizens feel more and more threatened from outside, not least since the Russian invasion began. And this makes paralysis increasingly unacceptable.

Brexit has translated into reality the theoretical reasons in favor of leaving the EU and, if the benefits of this split still appear extremely uncertain, the costs are all too obvious.

Therefore, if paralysis and exit from the EU appear unattractive, the relative costs of further integration appear lower.

We will not be able to create the operational capacity of the EU without reviewing the European fiscal structure. In conclusion, the war in Ukraine has profoundly redefined our Union, not only in its membership or in its shared goals, but also in the awareness it has created: our future is entirely in our hands.

Translation by Anna Bissanti



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