Year LXI, 2019, Single Issue, Page 114
THE FRANCO-GERMAN BLUEPRINT FOR A EUROZONE BUDGET:
CRITICAL ISSUES AND OUTLOOK*
For a decade now, the eurozone has been experiencing a systemic crisis that, as well as throwing into question the profound reasons for the creation of the single currency, is also testing the European governments’ ability to pursue the right balance between financial solidarity and fiscal responsibility, in other words, a balance capable of guaranteeing the stability of the monetary union. Even though the explosion of the sovereign debt crisis in 2009 was triggered by the chronic weakness of some of the member states, it must be acknowledged that the causes of this weakness lie in the structural deficits of euro area governance, in particular the lack of a democratically legitimate economic government capable of implementing stability and convergence policies. Against this background, there has been growing talk of creating an instrument designed to meet the specific needs of the eurozone, i.e. an ad hoc eurozone budget. In the wake of lengthy discussions of this topic in academic circles, and expressions of support from various European and national institutions, in 2018 the French and German governments unveiled a blueprint for such a budget. On the basis of this plan, the Euro Summit of 14 December 2018 “mandat[ed] the Eurogroup to work on the design, modalities of implementation and timing of a budgetary instrument for convergence and competitiveness for the euro area”, specifying that the features of this instrument would be agreed in June 2019.
This article sets out to analyse the Franco-German proposal in light of the debate from which it sprang, and also to identify the critical issues it raises and its prospects for development.
2. The Deficiencies of the Economic and Monetary Union
To understand the deep-seated reasons behind the development of the eurozone budget proposal, it is necessary to appreciate the absolute uniqueness of the single currency. It is, after all, the only currency in the world that belongs not to a sovereign state, but to an association of states equipped to exercise certain specific powers conferred on them by international treaties. However, these powers do not extend to the sphere of fiscal policy making; in other words, they do not include the power to set levels of taxation and public expenditure. This latter power, given its importance in financing national policies and in building electoral consensus, is one that the member states still guard jealously as an exclusive competence. Ever since its conception in Maastricht, the Economic and Monetary Union (EMU) has therefore been characterised by an asymmetry: the member states transferred monetary sovereignty to the ECB-led European system of central banks, while continuing to manage fiscal policy at national level. The European Union has a budget, but this amounts to just 1 per cent of the GDP generated by its member states. Essentially, the EU budget is used to finance policies related to the functioning of the internal market; the main items of expenditure are, in fact, the Common Agricultural Policy and the Cohesion Policy. To prevent conflicts between Europe’s single monetary policy and numerous discretionary national fiscal policies from generating imbalances capable of destabilising the euro area, the Maastricht Treaty introduced a “surveillance model” according to which the EU institutions undertook to ensure that national budgets were coordinated and monitored on the basis of common rules.
According to the rules set out in the Maastricht Treaty, the market was meant to guarantee initial monitoring of the management of national public finances. Indeed, the ban on bail-outs between member states and the prohibition of monetary financing by the ECB were both measures intended to ensure that the financial markets would act as regulators of fiscal policies, i.e. by “punishing” less virtuous countries with the application of higher interest rates. At the same time, preventive and corrective coordination of these policies by the Commission and the Council, combined with the risk of sanctions, would, it was thought, ensure sound management of national public finances. However, the explosion of the sovereign debt crisis has shown, beyond doubt, that the “surveillance model” introduced in Maastricht is incapable of preventing the development of macroeconomic imbalances and, consequently, possible asymmetric shocks. First of all, the financial markets, acting in a regulatory capacity, proved to be wholly inefficient, for two reasons: because they failed to apply interest rates properly adjusted to the fiscal solidity of the member states, and because the explosion of the crisis was followed by speculative attacks against the eurozone’s weaker states. In the meantime, the European institutions’ surveillance of national budgets was not sufficient to avoid the accumulation of excessive deficits in many countries, largely due to the reluctance of the Council to actually sanction breaches of fiscal discipline. The above-described failure of the market and of the economic coordination strategy were then compounded, in the eurozone, by a lack of common crisis management mechanisms and by the serious difficulties encountered by the European banking system following its investment of large sums of money in member states’ debt.
Faced with the risk of the monetary union imploding as a result of multiple defaults among the member states and the eurozone’s leading credit institutions, the EU governments and institutions found themselves forced to adopt various reforms, three in particular, in order to deal with the emergency. First, the European Stability Mechanism (ESM) was created on the basis of an intergovernmental agreement between the euro area countries. The ESM is an international agency set up with the purpose of providing loans to countries (eurozone member states) on the brink of default, or affected by a severe banking crisis, where this situation threatens the stability of the eurozone as a whole. These loans are conditional upon the implementation of a programme of consolidation of national public finances and structural reforms, set out in a Memorandum of Understanding. Second, fiscal policy coordination was made more extensive and more rigid, with euro area member countries required, every year, to undergo an assisted procedure (involving the Commission, the Council and the Eurogroup) for the adoption of their national budgets. In addition, 25 EU member states signed an intergovernmental agreement, informally known as the “fiscal compact”, under which constitutional caps on public indebtedness were incorporated into the various national legislations. Third, to break the vicious circle between the sovereign debt crisis and the banking system crisis, an ECB-led single supervisory mechanism was created to oversee the most important credit institutions in the euro area, together with a single resolution mechanism supported by a single resolution fund, to minimise the impact of bank crises. These represent the first pillars of a future banking union, which must eventually also include a single deposit guarantee scheme and a common backstop for use in systemic crises.
3. Why Does the Eurozone Need a Budget?
Thus far, the measures introduced have made it possible to manage the sovereign debt emergency and save the monetary union from collapse. That said, the long-term stability of the euro area is still not guaranteed due to the structural weaknesses of a system of governance based on decentralised management of fiscal policies. Since the aforementioned reforms sought only to make economic union surveillance more efficient, they have essentially left the existing model intact. In particular, the EMU still suffers from three main flaws.
First of all, the euro area is not equipped to effectively manage the asymmetric shocks that can rock its economy. The ESM acts solely as a mechanism of last resort, meaning that it can support countries in financial distress only when the survival of the monetary union is at stake. In addition, it is a difficult tool to implement, as it requires broad political consensus among the governments of the euro area and the acceptance of harsh conditions by the country in need of financial assistance. On the other hand, to tackle the periodic crises that can affect their economies, the states must rely on the fiscal resources available in their national budgets. Consequently, each government has different crisis management capabilities, with the result that the weakest are bound to struggle more with the effects of an economic recession, and for longer, sometimes even finding themselves tipping into emergency situations that ultimately can be resolved only through recourse to the ESM.
The second flaw concerns the question of respect for fiscal discipline. Despite the tightening of European control over national macroeconomic policies and the imposition of internal constraints designed to limit excessive indebtedness, many member states still struggle to implement sustainable consolidation of national public finances and structural reforms. The new surveillance model, which envisages, among other things, the adoption of semi-automatic sanctions in the event of transgressions, does not seem to have led to more effective governance. The EU institutions remain reluctant to sanction countries that are striving to achieve a difficult balance between compliance with the European rules and their own economic growth needs. The only truly effective form of fiscal discipline is that seen in the setting of the conditional financial assistance granted by the ESM, where beneficiary countries know that they have to comply with the terms of the Memorandum of Understanding if they want to avoid default.
The third problem pertains to the question of the democratic legitimacy of eurozone economic governance. One effect of the strengthening of the supervisory mechanism is that the national parliaments are now effectively by-passed when it comes to making economic policy choices; indeed, these are now made by the governments in the setting of the Ecofin Council or the Eurogroup, without the involvement of the European Parliament. At the same time, the European rules seem to be applied mainly with the aim of preventing crisis situations, through the containment of public spending, rather than that of implementing a serious process of convergence and growth, designed to promote high levels of well-being and employment in all the member states.
The consequences of these structural deficits of governance are extremely serious. The eurozone continues to be exposed to asymmetric shocks and systemic crises. More dangerous still is the rise of anti-European movements in a growing number of countries. Such movements, leveraging the general social discontent and the EMU’s chronic weaknesses, paint the single currency as the root of all ills, and once in power would lose no time implementing policies incompatible with the stability of the euro area as a whole.
This difficult situation is the setting that gave rise to the idea of giving the eurozone a budget of its own, to be used to pursue common growth and development policies.
4. The Lengthy Gestation of the Eurozone Budget Proposal
In 1977, long before the birth of the single currency, it was suggested, in the MacDougall report, that the creation of a monetary union in Europe would require public expenditure amounting to 2-2.5 per cent of GDP in the preliminary pre-federal phase, rising to 5-7 per cent in the intermediate phase, and 20-25 per cent were the monetary union to become a true federation. Although the position subsequently adopted in Maastricht was the complete opposite of this — the Treaty left fiscal sovereignty at national level and introduced a surveillance model —, the explosion of the sovereign debt crisis and the difficulty guaranteeing the stability of the euro area inevitably brought this idea back to the fore, clearly showing the opportuneness of creating an ad hoc budget for the euro area in order to overcome the asymmetry between the economic union and the monetary union.
Back at the peak of the sovereign debt crisis, the then President of the European Council, Herman Van Rompuy, proposed the establishment of an integrated budgetary framework with a view to moving towards a fiscal union. This idea was subsequently taken up by the European Commission, both under Barroso and under Juncker. More recently, the European Parliament, for its part, approved a resolution supporting the creation of a budgetary capacity for the euro area. In addition to the various proposals from the European institutions, it is also worth remembering the various contributions to the debate made by national authorities (governments and central banks), which, through joint reports or individual declarations by their leaders, have advanced various suggestions supporting a process of fiscal policy centralisation in Europe. Finally, the academic world, too, has voiced its support for the idea of a eurozone budget, to be accompanied by stronger economic coordination, completion of the banking union, and the creation of more efficient debt restructuring mechanisms.
Two other key events have contributed to recent developments on this front: the Brexit referendum, which has shown that European integration is by no means an irreversible process, and Emmanuel Macron’s election as French president. In his State of the Union address in September 2017, the then President of the European Commission, Jean-Claude Juncker, spoke of the need for a “euro area budget line within the EU budget” (a proposal subsequently illustrated in more detail in a communication of December 2017). A few days later, in a speech given at the Sorbonne, President Macron presented his vision for a new “European Renaissance”. Among key tools necessary for creating true European sovereignty, he underlined the need to create a budget for the euro area. The French president’s ambitious proposal — he envisaged a budget amounting to several percentage points of the euro area GDP and the development of a European economic policy —, proved sufficient to jolt Germany, which until then had always resisted the idea of a common budgetary instrument. However, because of the well-known difficulties prior to the formation of the fourth Merkel government, and the lengthy negotiation necessary to arrive at a common position, the Franco-German proposal for a euro area budget was not formalised until June 2018, when the two countries issued their joint declaration in Meseberg.
5. From the Commission’s Proposal to the Franco-German One
As we have just mentioned, in December 2017 the European Commission, in a special communication, set out its proposal to equip the eurozone with new budgetary instruments to be created within the EU budget. As conceived by the Commission, the eurozone budget line should have different functions. For example, it should provide structural reform assistance to member states requesting it, act as a “a convergence instrument to give pre-accession assistance to Member States on their way to joining the euro”, and above all fulfil a stabilisation function, “as a way of preserving investment levels in the event of large asymmetric shocks.”
The idea was subsequently developed within the planned 2021-2027 Multiannual Financial Framework (MFF), for which proposals were presented in May 2018. These included, in particular, the creation of two tools for strengthening the EMU. In each of these cases, the Commission quickly followed up with a specific proposal for a regulation. First of all, the Commission proposed a “Reform Support Programme” designed to “offer technical and financial support for reforms at national level with an overall budget of EUR 25 billion”. It was envisaged that this programme would need to include “a Reform Delivery Tool providing financial incentives across all Member States for key reforms identified as part of the European Semester” and a “dedicated convergence facility to support non-euro area Member States seeking to adopt the single currency” in the short term. As specified in the proposal, its legal basis was Art. 175 (third paragraph) of the Treaty on the Functioning of the European Union (TFEU), which regulates specific actions in the field of economic, social and territorial cohesion that might prove necessary outside the Structural Funds, and Art. 197, par. 2, TFEU concerning how “the Union may support the efforts of Member States to improve their administrative capacity to implement Union law.” The second tool was a “European Investment Stabilisation Function”, also created on the basis of Art. 175, par. 3, TFEU, with the purpose of providing loans with a fixed ceiling of EUR 30bn (called “back-to-back” loans) guaranteed by the EU budget, as well as financial assistance in the form of interest rate subsidies. During times of increased pressure on public finances, the European Investment Stabilisation Function should support member states whose currency is the euro and other member states that participate in the ERM II exchange rate mechanism (currently only Denmark), helping them to sustain public investments in priority sectors. Minor crises, on the other hand, should continue to be managed through the national budgets. It was specified that activation of this function would be conditional upon compliance with the public finance rules laid down by Union law, and should therefore encourage the implementation of these rules. In general, the new budgetary instruments should help the existing funds, in particular the European Structural and Investment Funds, to support economic convergence and financial stability, specifically within the euro area.
This plan, put forward by the Commission, was very quickly followed (and indeed surpassed) by a proposal from France and Germany. On 16 November 2018, the governments of these two countries, having already reached the agreement in principle set out in the aforementioned Meseberg Declaration, illustrated in a joint document, the main elements of their blueprint for a eurozone budget. This document was then analysed by the Eurogroup, followed by the Euro Summit. The Franco-German proposal, although not explicitly referred to, was essentially the basis on which the Euro Summit, in its declaration of 14 December 2018, authorised the Eurogroup to develop a “budgetary instrument for convergence and competitiveness for the euro area”.
The Franco-German proposal differs in several respects from that of the Commission. To begin with, it appears to focus more specifically on the euro area. Whereas the Commission suggested that access to the Reform Support Programme should also be made available to non-euro countries, with the intention of supporting their process of joining the euro, the Franco-German proposal envisages an instrument aimed specifically at ensuring higher convergence between and competitiveness of the countries that already use the single currency. This clear focus on the euro area also explains the partially different legal basis identified. In addition to Art. 175, par. 3, TFEU, already mentioned in the Commission’s proposal, the Franco-German drafters also cited Art. 173 TFEU on the competitiveness of EU industry, Art. 182 TFEU on research and technological development, and, above all, Art. 136 TFEU on the adoption of provisions specific to member states whose currency is the euro. At the same time, it was specified that “regardless of the restricted scope of application of the instrument, all 27 MS would be entitled to vote in the Council on the legislative proposal establishing the eurozone budget.”29
Another key difference concerns the sphere of governance. Although it is specified that the eurozone budget, as part of the EU budget, would be subject to the Union’s general democratic rules and controls, it actually appears to be a predominantly intergovernmental mechanism. In fact, the instrument “would operate with the strategic guidance of the Euro Summit, which would be operationalised by the Eurogroup on a yearly basis”. On the basis of funding priorities identified by these two bodies, the eurozone member states would be required to prepare programmes for the use of resources in their territories. These programmes should have a limited time frame and, if requested by the governments, should be amendable in order to reflect new investment and reform priorities. Furthermore, the Franco-German proposal also states clearly that the member states would be eligible to receive support only if they pursued “policies that are in accordance with their obligations under the European economic policy coordination framework, including fiscal rules.”29
As regards the resources financing the new budget, the proposal envisages the use of “external assigned revenues” that might derive from a financial transaction tax or from European resources, for example. Ultimately, though, the “assigned revenues would consist of regular contributions by eurozone member states, collected and transferred to the EU budget on the basis of an intergovernmental agreement (IGA)” whose contracting parties would be the eurozone member states. This IGA “would provide for a methodology to determine the contributions by each eurozone member state and a binding maximum amount [as well as for] a decision procedure on the funding priorities” of the budget (a procedure that, as shown above, would in any case be controlled by the Euro Summit and the Eurogroup).
A key objective of the EU budget outlined in the Franco-German proposal is to pursue “a higher level of convergence and competitiveness within the eurozone” through the support of strategic investments and the implementation of structural reforms by the member states. More specifically, the proposed budget is designed to co-finance “growth-enhancing public expenditures such as investments, research and development, innovation and human capital.” Moreover, the joint proposal, like the one advanced by the Commission, offers the prospect of the budget possibly also playing a stabilising function in the eurozone, even though the Euro Summit’s declaration on 14 December 2018 made no reference to such a function. Significantly, the Franco-German drafters underline that the purpose of pursuing “a higher level of convergence and competitiveness within the eurozone” is to “ensure stability of the euro area as a whole”, which is the primary objective of economic policy in the European Union.
In conclusion, although the eurozone budget as envisaged by the French and German governments would be part of the EU budget, and negotiated within the MFF negotiations, in actual fact it emerges as a hybrid mechanism that does not fully comply with the general EU budget rules. Although the proposed instrument contains certain common procedural elements, it is easy to imagine that it would, in reality, assume a degree of autonomy. However, before drawing any definitive conclusions it will be necessary to examine the document produced by the Eurogroup following the mandate received at the 14 December Euro Summit.
6. Critical Issues
The Franco-German blueprint is an important step towards overcoming the imbalance between the economic and the monetary union that still threatens the survival of the single currency project. Indeed, this plan seems to have finally established the idea that the euro area can develop a budget policy of its own, albeit within the context of a still strongly intergovernmental governance framework. At the same time, the plan is not without its problems, and these will have to be addressed during its implementation.
6.1. The Problem of its Legal Basis.
As already mentioned, the Franco-German plan cites, among its different legal bases, Art. 136 TFEU. In particular, the first paragraph of this article states that “to ensure the proper functioning of economic and monetary union, and in accordance with the relevant provisions of the Treaties, the Council shall (...) adopt measures specific to those Member States whose currency is the euro: (a) to strengthen the coordination and surveillance of their budgetary discipline; (b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance.”
In the Franco-German document the reference to Art. 136 TFEU seems to be dictated by the need to find a legal basis allowing the application of the new instrument only to eurozone member states. In this regard, it should be remembered that the fact of sharing a single currency has deprived these states of some of the most important tools through which they might otherwise seek to achieve convergence and competitiveness of their economies, in particular an autonomous exchange rate adjustment mechanism, and that because of their strong interdependence, these countries are also subject to stricter budgetary and coordination rules. For these reasons, there is a need to create new tools able to strengthen convergence and competitiveness within the euro area, and since Art. 136 TFEU is the only provision that envisages the creation of specific mechanisms for the countries that share the single currency, its use as the legal basis of the project was inevitable.
However, while this reasoning cannot be faulted, it seems insufficient. The use of Art. 136 TFEU might, in fact, be better justified by another consideration, namely that the creation of an ad hoc financial instrument might actually improve economic coordination between countries sharing the single currency, by encouraging compliance with budgetary rules. However, the drafters of the plan, in the passages where reference is made to other legal bases and to the fact that all 27 member states would be entitled to vote in the Council on the legislative proposal establishing the eurozone budget (rather than solely the Council representing member states whose currency is the euro, as envisaged under paragraph 2 of the same article), seem to be admitting that the proposed budget’s true purpose goes beyond the confines of the eurozone. At the same time, it is also worth recalling that, in the context of several previous reforms legitimised on the same legal basis, it has already been clarified that Art. 136 TFEU does not allow the nature of economic governance to be changed, only improved and strengthened. It should indeed be noted that Art. 136 TFEU includes a clause on the requirement of conformity with the Treaty provisions that regulate the process of economic coordination, which can be made more efficient and effective but may not be superseded by positive integration tools other than those that are already available. The question that therefore arises is whether the transition from a model based on surveillance of national budgets to a preliminary (indeed, embryonic) form of fiscal union is possible without modifying the Treaties. Because in this latter scenario it would no longer be a matter of giving governments recommendations on how best to develop their internal budgetary policies, but rather of giving the eurozone a budgetary policy of its own, shaped by its own strategic priorities and designed to promote the economic growth of its member states.
6.2. Doubts Over the Effectiveness of the Instrument.
The second question mark over the proposed eurozone budget is whether it would actually be able to deliver greater convergence and competitiveness of the bloc’s economy and, with that, greater stability of the entire monetary union. Of course, the main factor to consider in this regard is the overall size of the budget, which the Franco-German proposal is careful not to define, merely stating that this aspect would be negotiated in the context of the MFF.
An idea of the sums that might plausibly be available to finance the new instrument can be gained from the earlier proposal advanced by the Commission; after all, the governments are unlikely to countenance any amounts substantially greater than those the Commission suggested, given the hostility of some of them to the whole project. And yet, as we have already said, the Commission envisaged allocating only limited resources to the euro area budget line within the planned 2021-2027 MFF, specifically EUR 25 billion for the Reform Support Programme and 30 billion for the European Investment Stabilisation Function.
Assuming that the governments accept such figures, would these resources be sufficient to effectively pursue the objectives of stability and convergence of the euro area? This is a perfectly legitimate question. In this regard, we can consider, for the sake of comparison, the impact that the European Fund for Strategic Investments (EFSI), introduced by the so-called Juncker Plan, had on the European economy. Under this plan, a total of EUR 21 billion was made available at EU level (through the EU budget and the EIB) with the aim of mobilising “at least EUR 315 billion in additional public and private investment into the real economy”, thanks to “an overall multiplier effect of 1:15”. The programme has been active since 2015 and the Council recently decided to extend it (as the so-called EFSI 2.0). Nevertheless, most commentators agree that the EFSI played an only limited part in Europe’s economic recovery.
The proposed eurozone budget is obviously a useful tool for supporting growth and encouraging budgetary policy coordination, but it clearly lacks the resources necessary to impact meaningfully on the states’ economic cycles; this applies both in ordinary times, and even more so during times of crisis. It is therefore unlikely that such a limited budget could ensure effective convergence of euro area countries, or be used as an anti-cyclical tool to ensure the stability of the euro area as a whole. The most up-to-date economic analyses suggest that, depending on the functions of the budget, at least a few hundred billion euros (between 1 and 3 per cent of the GDP of the euro area) would be needed to achieve the objectives set out in the Franco-German proposal.
But in addition to its size, the effectiveness of the eurozone budget would also depend on other factors. An important one, for example, is the type of support it would be required to provide, in other words, whether it would be used to grant loans or non-repayable funding. It goes without saying that only the latter would contribute significantly to convergence between states, especially those already burdened by a high level of public debt. Another factor likely to influence the effectiveness of the budget is its governance. In this regard, we have already specified that, under the Franco-German proposal, management of the mechanism is entrusted to the Euro Summit and the Eurogroup, which operate internally on the basis of the rule of consent. Furthermore, the fact that the eurozone budget would be negotiated within the MFF, which is adopted subject to the agreement of all the EU member states, could also undermine its effectiveness. Generally speaking, in what continues to be a mainly intergovernmental governance framework, the effective functioning of the instrument would depend on the reaching of difficult political agreements and compromises between the states.
6.3. Democratic Legitimacy Issues.
The predominantly intergovernmental nature of the proposed euro area budget, in addition to jeopardising the effectiveness of the tool, also risks undermining its democratic legitimacy. As shown several times in the present analysis of the Franco-German proposal, the fundamental decisions would be taken by the Euro Summit and the Eurogroup, without substantial involvement of the only institution that represents the citizens of the Union as a whole, namely the European Parliament. However, the latter would still be called upon to approve the MFF. Furthermore, the fact that the eurozone budget is envisaged as an integral part of the EU budget implies that the European Parliament would also be able to exercise its powers of control over the implementation of the budget, before making its so-called discharge decision. Finally, indirect control may be exercised by the national parliaments, which, however, have been severely weakened in recent years due to the strengthening of the surveillance model, and in any case tend to act in the interests of their own citizens rather than in the general interests of the citizens of the EU.
7. Development Prospects
As we have said, despite the various issues discussed, the Franco-German eurozone budget proposal seems to herald a gradual paradigm shift, because under this proposal the stability of the euro area would not be safeguarded solely through the member states’ compliance with budgetary rules, but also through a euro area fiscal policy implemented alongside its monetary policy. This evolution is based on the realisation that economic policy within the monetary union cannot be an exclusively individual responsibility, but must be shared in some way. After all, the closeness of the interdependence between the member states of the monetary union is such that each of them, when acting for themselves, are actually taking decisions that also affect the others. To guarantee or at least foster the necessary sense of collective responsibility, it has become essential to create a common budgetary instrument focusing on the euro area.
Today, the single currency continues to be an only partial achievement. The key thing to understand is whether the eurozone budget project can evolve in a way that resolves the problems we have described — the asymmetry characterising the EMU and the gaps in economic governance —, thus allowing it to come to complete fruition. In other words, it needs to be understood whether the eurozone budget can be turned into a true European fiscal capacity, an outcome favoured by much of the legal doctrine and by numerous institutional players, or whether it will remain something purely symbolic. This is a question that can only be answered by considering the evolution of certain key aspects in the project’s implementation phase.
The first of these is the relationship between the eurozone and non-eurozone countries. As we have said, the Franco-German drafters expressly subject the new budget to the rules of the MFF, within which it would be negotiated. This mechanism could hand non-euro countries a veto, or in any case give them the possibility to influence decisions relating to euro area budgetary policy. On this basis, the eurozone budget would be unlikely to evolve into a true European budgetary capacity. In fact, the difficult decision to share the fiscal sovereignty in Europe can only be made, if ever, between countries that have joint monetary sovereignty and therefore share responsibility for their common stability. Involving countries from outside the eurozone will only strengthen the minimalist and wait-and-see positions held by those who, claiming to want to preserve the unity of the 27-member framework, are hostile to any deepening of European integration that entails transfers of sovereignty to European level. It remains to be seen how much autonomy the eurozone manages to carve out for itself, in other words the extent to which, in its efforts to manage and develop the new budget, it can avoid the need for unanimous decisions by all the EU member states.
The second aspect to consider is what mandate the instrument will actually be able to fulfil. Even though, for the moment, it seems to be designed to encourage only convergence, not stabilisation, it remains to be seen how it would be implemented in practice. Rules imposed as a condition for receiving funding could, for example, be loosened should countries face objective difficulties in times of crisis; states affected by economic shocks could be allowed to enjoy more significant investment support than those going through an expansionary economic phase. In this way, the eurozone budget would be closer to an investment stabilisation function. In this regard, the actual size of the budget would be a decisive factor. As already remarked, a budget amounting to several tens of billions would make no difference in terms of either convergence or stabilisation of the euro area.
The third aspect to consider is the type of resources used to feed the budget. At present the idea seems to be that the instrument should be financed through national contributions rather than true own resources. Obviously, the chances of developing the budget will also depend on the nature of the resources used. If autonomous and specific resources were used, the budget would naturally be freer to evolve in the direction of a true budgetary capacity. Conversely, should the project envisage only transfers from national budgets, those governments able to count on greater fiscal solidity would inevitably be driven by the logic of self-interest to resist any future development of the instrument.
Andrea Santini and Luca Lionello**
* This essay was originally published in Italian in Diritto Comunitario e degli Scambi Internazionali, n. 3/2018, © Editoriale Scientifica, Srl. We wish to thank the publisher giving us permission to republish it in Il Federalista 2019, n. 61, and in English here. The content of the essay been updated to take into account the Euro Summit decisions of December 2018.
 In its judgement of 12 October 1993 ratifying the Maastricht Treaty, the German Constitutional Court defined the European Union an “association of states” (Staatenverbund), BVerfGE 89/155, par. 112, 135.
 See K. Tuori and K. Tuori, The Eurozone Crisis. A Constitutional Analysis, Cambridge, Cambridge University Press, 2014, p. 31.
 On the EU budget in general, see A. Santini, Unione europea (bilancio della), in Enc. dir., Annali, VIII, Milan, Giuffrè, 2015, pp. 821 onwards.
 See A. Hinarejos, The Euro Area Crisis in Constitutional Perspectives, Oxford, Oxford University Press, 2015, p. 1621.
 The Council’s refusal to sanction the excessive deficits of France and Germany in 2003 is the most striking example of this reluctance. Although the Commission appealed to the Court of Justice, the latter nevertheless judged the Council’s decision legitimate, recognising its full discretion in the application of the economic coordination procedures. See the judgement of the European Court of Justice of 13 July 2004, Case C-27/04, Commission of the European Communities v Council of the European Union, EU:C:2004:436, especially point 80.
 The total subscribed capital of the ESM is EUR 700 billion, which is guaranteed by the member states’ budgets. It was preceded by two temporary funds: the European Financial Stability Fund, a Luxembourg-based limited company established, following a Eurogroup decision, on 7 June 2010 between the eurozone countries, and financed by eurozone member states to the value of EUR 440 bn; and the European Financial Stabilisation Mechanism, a funding programme created under Council Regulation (EU) No 407/2010 on the basis of Art. 122(2) TFEU. Backed by the EU budget, it has the authority to raise up to EUR 60 bn.
 The country applying for assistance from the ESM must negotiate the agreement with the European Commission in close cooperation with the ECB and IMF. The creditor countries are then required to approve it at a meeting of the ESM Board of Governors.
 The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union was signed on 2 March 2012 by all the countries then belonging to the EU, with the exception of the UK and the Czech Republic.
 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, in OJ, L 287, 29 October 2013, pp. 63 onwards.
 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, in OJ, L 225, 30 July 2014, pp. 1 onwards. The Single Resolution Fund is used to bail out failing banks when all the other restructuring options have been exhausted. It is financed to the value of EUR 55 billion by contributions from the banking sector.
 Commission of the European Communities, Report of the Study Group on the Role of Public Finance in European Integration, April 1977, http://aei.pitt.edu/36433/1/Report.study.group.A13.pdf.
 Herman Van Rompuy (in close cooperation with José Manuel Barroso, Jean-Claude Juncker e Mario Draghi), Towards a Genuine Economic and Monetary Union, 5 December 2012.
 Communication from the Commission, A blueprint for a deep and genuine economic and monetary union. Launching a European Debate, Com(2012)777 final, dated 28 November 2012, https://ec.europa.eu/transparency/regdoc/rep/1/2012/EN/1-2012-777-EN-F1-1.Pdf.
 Jean-Claude Juncker (in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz), Completing Europe’s Economic and Monetary Union, 22 June 2015, https://ec.europa.eu/commission/sites/beta-political/files/5-presidents-report_en.pdf.
 European Parliament resolution of 16 February 2017 on budgetary capacity for the euro area, P8_TA(2017)0050, www.europarl.europa.eu/doceo/document/TA-8-2017-0050_EN.html.
 See, for example, the joint declaration made by Bundesbank president, Jens Weidmann, and the Governor of the Banque de France, François Villeroy de Galhau, Renforcer l’intégration européenne pour restaurer la confiance, published on 5 February 2016 in Le Monde and Süddeutsche Zeitung; the document entitled Una strategia europea condivisa per crescita, lavoro e stabilità, published by the Italian government on 22 February 2016, available at:
https://www.esteri.it/mae/resource/doc/2018/06/una_strategia_europea_condivisa.pdf ; and the Spanish contribution to discussion about Governance of the European Monetary Union, dated 27 May 2015, available at:
 See, among many, C. Cottarelli, A European fiscal union: the case for a larger central budget, Economia Politica, 33, n. 1 (2016), pp. 1-8. https://link.springer.com/article/10.1007/s40888-016-0026-2; N. Arnold, B. Barkbu, E. Ture, H. Wang, J. Yao, A Central Fiscal Stabilization Capacity for the Euro Area, IMF Staff Discussion Note, March 2018, SDN/18/03,
https://www.imf.org/~/media/Files/Publications/SDN/2018/SDN1803.ashx; A. Bénassy-Quéré et al., Reconciling risk sharing with market discipline: A constructive approach to euro area reform, CEPR Policy Insight No. 91, January 2018, https://cepr.org/active/publications/policy_insights/viewpi.php?pino=91. Among the contributions offering a legal perspective, see G. Rossolillo, Autonomia finanziaria e integrazione differenziata, Il Diritto dell’Unione Europea, (2013), pp. 793 onwards, especially pp. 809 onwards; F. Croci, Un bilancio “aggiuntivo” per l’eurozona? Proposte, problemi e prospettive, Federalismi.it, 12, n. 21 (2014); S. Cafaro, L’Unione Economica e Monetaria dopo la crisi. Cosa abbiamo imparato?, Naples, Edizioni Scientifiche Italiane, 2017, especially pp. 77 onwards.
 President Jean-Claude Juncker’s State of the Union Address 2017, Brussels, 13 September 2017. https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_17_3165.
 New initiative for Europe – President Macron’s speech calling for a sovereign, united and democratic Europe, Sorbonne University, Paris, 26 September 2017, https://www.elysee.fr/emmanuel-macron/2017/09/26/president-macron-gives-speech-on-new-initiative-for-europe.en.
 See the interview with Emmanuel Macron published in Le Point, 30 August 2017, available at: https://www.lepoint.fr/politique/exclusif-emmanuel-macron-le-grand-entretien-30-08-2017-2153393_20.php.
 Meseberg Declaration. Renewing Europe’s promises of security and prosperity, adopted during the Franco-German Council of Ministers on 19 June 2018. https://www.diplomatie.gouv.fr/en/country-files/germany/events/article/europe-franco-german-declaration-19-06-18.
 Communication from the Commission to the European Parliament, the European Council, the Council and the European Central Bank, New Budgetary Instruments for a Stable Euro Area within the Union Framework, Com(2017)822 final, dated 6 December 2017, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017DC0822&from=EN.
 A further function, relating to the “common backstop” for the banking union, was subsequently assigned to the EMS in the draft reforms presented by both the Commission and the Euro Summit.
 Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, A Modern Budget for a Union that Protects, Empowers and Defends The Multiannual Financial Framework for 2021-2027, Com(2018)321 final, dated 2 May 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2018%3A321%3AFIN.
 Proposal for a Regulation of the European Parliament and of the Council on the establishment of the Reform Support Programme, Com(2018) 391 final, dated 31 May 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018PC0391&from=EN.
 Proposal for a Regulation of the European Parliament and of the Council on the establishment of a European Investment Stabilisation Function, Com(2018) 387 final, dated 31 May 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018PC0387&from=EN.
 The euro area member states should finance these subsidies with contributions representing a percentage of their monetary income (seigniorage).
 Proposal on the architecture of a Eurozone Budget within the framework of the European Union, 16 November 2018. https://www.consilium.europa.eu/media/37011/proposal-on-the-architecture-of-a-eurozone-budget.pdf.
 See Euro Summit meeting (14 December 2018) – Statement, EURO 503/18, especially point 4, which reads as follows: “In the context of the Multiannual Financial Framework (MFF), we mandate the Eurogroup to work on the design, modalities of implementation and timing of a budgetary instrument for convergence and competitiveness for the euro area, and ERM II Member States on a voluntary basis. It will be part of the EU budget, coherent with other EU policies, and subject to criteria and strategic guidance from the euro area Member States. We will determine its size in the context of the MFF. The features of the budgetary instrument will be agreed in June 2019. The instrument will be adopted in accordance with the legislative procedure, as foreseen by the Treaties, on the basis of the relevant Commission proposal to be amended if necessary.” See note 1 above.
 See ECJ Judgment of 27 November 2012, Case C-370/12, Pringle, EU:C:2012:756, particularly point 56.
 Art. 136 TFEU has already served as the legal basis for reforming eurozone governance, specifically in the years immediately after the explosion of the sovereign debt crisis. One of the most controversial measures approved on this legal basis was the introduction of semi-automatic sanctions for euro area countries not complying with European recommendations in the framework of economic policy coordination. This innovation attracted several criticisms, which are worth recalling here in relation to the hypothesis of establishing an ad hoc budget for the euro area on the same legal basis. See among others: R. Palmstorfer, The Reverse Majority Voting under the “Six Pack”: A Bad Turn for the Union?, European Law Journal, 20, n 2 (2014), pp. 186-203; K. Tuori and K. Tuori, The Eurozone Crisis. A Constitutional Analysis, op. cit., note 2, pp. 170-171.
 The Franco-German proposal’s failure to specify size of the budget is due mainly by the two countries’ different positions on this aspect. Whereas the French government wanted a budget worth several percentage points of the euro area GDP, the German government felt that the total should be “at the lower end of the double-digit billions of euros range”. See Angela Merkel’s interview with Frankfurter Allgemeine Zeitung, Europa muss handlungsfähig sein – nach außen und innen, 3 June 2018.
 A group of countries led by the Netherlands initially tried to boycott the plan for a common eurozone budget. On 23 June 2018, the Dutch finance minister Wopke Hoekstra sent the president of the Eurogroup Mario Centeno a letter co-signed by ministers from other countries (Austria, Finland, Sweden, Denmark, Lithuania, Latvia, Estonia, Ireland, Belgium, Luxembourg) in which they expressed their strong opposition to the planned eurozone budget.
 Communication from the Commission to the European Parliament, the Council. the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, An Investment Plan for Europe, Com(2014) 903 final, dated 26 November 2014,
 Regulation (EU) 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Investment Project Portal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 — the European Fund for Strategic Investments, OJ L 169, 1.7.2015, pp. 1-38.
 Regulation (EU) 2017/2396 of the European Parliament and of the Council of 13 December 2017 amending Regulations (EU) No 1316/2013 and (EU) 2015/1017 as regards the extension of the duration of the European Fund for Strategic Investments as well as the introduction of technical enhancements for that Fund and the European Investment Advisory Hub, OJ L 345, 27.12.2017, pp. 34-52.
 See C. Tovo, Il Fondo europeo per gli investimenti strategici: statuto giuridico, profili istituzionali e funzionamento, Il Diritto dell’Unione Europea, 2016, pp. 357 onwards, especially p. 399; D. Rinaldi and J. Núñez Ferrer, The European Fund for Strategic Investments as a New Type of Budgetary Instrument, CEPS Research Report, No 2017/07, April 2017, p. 21, https://www.ceps.eu/wp-content/uploads/2017/04/RRpt%20No%202017-07%20EFSI.pdf.
 See A. Marzinotto, A. Sapir, G.B. Wolff, What kind of Fiscal Union?, Bruegel Policy Brief 2011/06, November 2011, p. 7; C. Allard et al., Toward a Fiscal Union for the Euro Area, IMF Staff Discussion Note, September 2013 SDN/13/09, p. 19, https://www.imf.org/external/pubs/ft/sdn/2013/sdn1309.pdf; P. De Grauwe, Economics of Monetary Union, Oxford, Oxford University Press, 2016, pp. 217-218. The Commission envisages that expenditure amounting to at least 2 per cent of euro area GDP would be needed to ensure an efficient stabilisation function: see Commission Staff Working Document Impact Assessment Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on the establishment of a European Investment Stabilisation Function, SWD(2018) 297 final, dated 31 May 2018, p. 52, https://ec.europa.eu/transparency/regdoc/rep/10102/2018/EN/SWD-2018-297-F1-EN-MAIN-PART-1.PDF.
 The proposed budget could plausibly be used to provide non-repayable funding, like that provided in the framework of the European cohesion policy. However, the Commission indicated that some budgetary instruments for the euro area (in particular the stabilisation function) should mostly take the form of loans, “to be supplemented with a limited grant support.” https://ec.europa.eu/transparency/regdoc/rep/10102/2018/EN/SWD-2018-297-F1-EN-MAIN-PART-1.PDF.
** Although the present essay is the result of joint reflection by the two authors, paragraphs 1-5 are to be attributed to Luca Lionello and paragraphs 6 and 7 to Andrea Santini.