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Summary: Between the ongoing

sovereign debt crisis and the

feeble European economic
recovery, many EU member
states currently fnd themselves
clamped in an increasingly tight
vice. On one hand, they are
forced to adopt harsh measures
to avert the risk of collapse of
further economic sectors; on
the other, they seek to support
workers who lost their jobs and,
more generally, attempt to miti-
gate the effects on those who
have been hit the hardest by the
crisis. Considering these budget
problems that limit the abilities
of countries to launch expan-
sionary policies, the EU should
play a decisive role to help the
economic recovery through a
Growth Pact. Such a policy would
help to reduce the increasingly
unbearable social tensions in
many countries and, due to
positive automatic effects on tax
revenues, relax the burdens of
national budgets.
Foreign Policy Program
Policy Brief
A European Fund for Growth and
Employment: A First Step Toward
a Eurozone Budget
by Alberto Majocchi
1744 R Street NW
Washington, DC 20009
T 1 202 745 3950
F 1 202 265 1662
June 2014
Economic Policy in the United
States and Europe Following the
2008 Crisis
Te deep crisis that ravaged the
world economy afer the collapse of
Lehman Brothers on September 15,
2008 began in the United States, but
its foremost consequences were felt in
Europe. Te continents banks were
afected immediately by the situation
in the United States, forcing European
governments to intervene swifly to
support the banking system through
vast injections of public money. At
the same time, European banks were
forced to impose a credit squeeze on
their customers. Businesses in turn
reduced levels of productive activity,
leading to contractions of house-
hold incomes and further lowering
demand of consumer goods. Te
fnancial crisis had extended quickly
to the real economy and involved,
albeit in diferent ways, all the indus-
trialized areas of the world.
Faced with a global recession, coun-
tries reacted strongly, overcoming
their hesitations for large-scale public
intervention, which had become rare
since the times of Ronald Reagan
and Margaret Tatcher. Instead, large
stimulus packages were introduced
to strengthen the real economy. But
reactions varied in scope and size.
Te response to the crisis was overall
more forceful and more immediate
in the United States than in Europe,
where each country introduced indi-
vidual measures and only the Euro-
pean Central Bank was in a position
to take comprehensive euro area-wide
steps. Te weaker response of Euro-
pean Union and eurozone member
states was a result of self-reinforcing
factors: frst, the decision-making
process on economic policy in the EU
is of a confederal nature. Joint policy
reactions must thus be based on coor-
dination slow and inefcient of
decisions taken at the national level.

Furthermore, decisions regarding
1 According to Article 120 of the Treaty on the Function-
ing of the European Union (TFEU), Member States shall
conduct their economic policy with a view to contributing
to the achievement of the objectives of the Union, as de-
fned in Article 3 of the Treaty on European Union (TEU),
and in the context of the broad guidelines referred to in
Article 121(2) TFEU. The Member States and the Union
shall act in accordance with the principle of an open
market economy with free competition, favouring an eff-
cient allocation of resources, and in compliance with the
principles set out in Article 119. In Article 3 TEU, after
having stated that the Unions aim is to promote peace,
its values and the well-being of its peoples, it is added
that the Union shall establish an internal market. It shall
work for the sustainable development of Europe based
on balanced economic growth and social progress,
and a high level of protection and improvement of the
quality of the environment. It shall promote scientifc and
technological advance. Finally, and most importantly,
Article 3(4) TEU states that the Union shall establish
an economic and monetary union whose currency is the
euro. Then, a monetary union is not enough and Europe
should proceed toward a full economic union, in view
of an ever closer union among the peoples of Europe
(Article 1 TEU).
Foreign Policy Program
Policy Brief
It may be expedient for individual
countries to seek to beneft
from other countries efforts
to stimulate their economy, as
positive effects will spread and
affect the whole area.
fscal interventions must be taken unanimously,
to additional delays and necessitating an array of compro-
mises to reach an agreement.
Another factor impeding a more vigorous and speedy reac-
tion in Europe concerns the potential for free riding in an
interdependent economic area. In such an environment, it
may be expedient for individual countries to seek to beneft
from other countries eforts to stimulate their economy, as
positive efects will spread and afect the whole area.
Te Maastricht Treaty rules regarding the extent of public
defcits further limited the fscal policy options of indi-
vidual member states. Similarly, a joint intervention of the
European Union was constrained by the limited size of
the EU budget (about 1 percent of European GDP). Te
European reaction was thus smaller than the U.S. response
and had the limited objective of preventing the crisis from
turning into a catastrophic recession.
The Constraints on National Expansionary Policies
Between the ongoing sovereign debt crisis and the feeble
European economic recovery, many EU member states
currently fnd themselves clamped in an increasingly tight
vice. On one hand, they are forced to adopt harsh measures
to avert the risk of collapse of further economic sectors; on
the other, they seek to support workers who lost their jobs
and, more generally, attempt to mitigate the efects on those
who have been hit the hardest by the crisis. Te situation
is further compounded by decreasing public fnances as a
result of contracting revenues and the restrictions imposed
by the Maastricht Treaty.
Considering these budget problems that limit the abilities
of countries to launch expansionary policies, the EU should
play a decisive role to help the economic recovery through
a Growth Pact. Such a policy would help to reduce the
increasingly unbearable social tensions in many countries
and, due to positive automatic efects on tax revenues, relax
the burdens of national budgets. However, the EUs budget
resources are limited. Furthermore, governments are seem-
ingly preoccupied by discussions about the creation of a
European Banking Union, and are thus less inclined to
2 Article 312(2) TFEU states: The Council, acting in accordance with a special legisla-
tive procedure, shall unanimously and after consulting the European Parliament adopt
a decision laying down the provisions relating to the system of own resources of the
Union (Article 311 TFEU). And regarding the Multiannual Financial Framework limiting
the development of expenditures, the Council shall act unanimously after obtaining the
consent of the European Parliament.
implement a more wide-ranging plan to bring Europe out
of the crisis.
Still, the experiences of some European countries over the
last years have revealed the limits of austerity,
and the
International Monetary Fund (IMF) has recently recog-
that fscal multiplier efects are generally larger than
1 and that fscal consolidation measures necessarily bring
about defationary efects.

Given the interdependence of the internal market, there
is no national solution to ending the crisis. To get out of
this impasse, a new political initiative at the European level
is thus urgently needed in order to launch a true eurozone
recovery plan.
3 According to the Keynesian theory, an increase in public expenditure or a reduction in
taxes will provide expansionary effects on GDP. Recently, a new school of thinking has
expressed a different view, assuming that a reduction in expenditures or an increase in
taxation will increase GDP since people expect that a reduced defcit will imply lower
tax needs in the future, then more disposable income, and begin immediately to spend
more (these are the presumed anti-Keynesian, expansionary effects of fscal consolida-
4 IMF, World Economic Outlook, October 2012, pp. 41-43. See also O.
Blanchard-D. Leigh, Growth Forecast Errors and Fiscal Multipliers, IMF Working
Paper 13/1, January 2013.
5 In a recent paper, it has been underlined that the stronger the austerity
programme, the deeper the decline in GDP. The estimated equation suggests
that on average for every 1% increase in austerity, output declines by 1.4%. This
implies that a 1% increase in austerity only leads to a 0.5% improvement in the
budget balance. Put another way, in order to improve the budget balance by 1%,
an austerity programme of at least 2% is necessary. Given our measure of the
fscal multiplier of 1.4, this also implies a drop in GDP of 2.8%. Thus, the eurozone
austerity programme imposed a very unfavourable trade-off for the periphery
countries: in order to improve their government budget balance by 1% a sacrifce
of 2.8% of GDP was necessary. As a matter of fact, the imposition of austerity
programmes in the eurozone has fallen victim to the fallacy of composition. What
works for one nation fails to work when every nation applies the same policies ().
When all countries try to save more at the same time, each countrys attempt to
do so makes it harder for the others to achieve their objectives. Then, it is high
time that the Commission takes up its role of defending the interests of the debtor
nations with the same vigour that it defends the interests of the creditors. See
P. De Grauwe-Y.Ji, The Legacy of Austerity in the Eurozone, CEPS Commentary,
October 4, 2014.
Foreign Policy Program
Policy Brief
Europe remains the weak point of
the world economy.
A European Fund for Growth and Employment
According to IMF forecasts, the rate of growth within the
euro area is still negative (-0.4 percent) in 2013 and will
reach only 1 percent (1.1 percent according to the Euro-
pean Commission) in 2014, while growth in the United
States in the same periods will be 1.6 percent and 2.6
percent, respectively. Meanwhile, emerging economies will
likely continue to see relatively high rates of growth, and
in Japan, the expansionary monetary policy of the Abe
government will bring the country out of a long period of
Europe remains the weak point of the world
economy. While the experience of this long crisis has
shown that the current decision-making processes were
sufcient to avoid the risk of an even deeper recession, the
current coordination method of economic policy nonethe-
less appears woefully inadequate to reach the objectives of
the Europe 2020 strategy
and, in the short term, to guar-
antee a full recovery of economic activity in the euro area
and a renewed competitiveness of the European economy.
Much has already been achieved with regards to gover-
nance reform in the eurozone. Most of these reforms have
thus far focused on achieving fnancial stability, with the
signature of the Treaty on Stability, Coordination, and
Governance (the Fiscal Compact) in March 2012, the Six
Pack in December 2011, and the Two Packs entry into
force in May 2013.
Furthermore, there is now a general
consensus that every country is obliged to pay back its own
debt accumulated in the past. Te appropriate measures
are now in place to ensure that fnancial stability will be
pursued by each member state within the eurozone under
stringent European control. But fscal consolidation will be
difcult to achieve if a recovery of the European economy
is not rapidly forthcoming.
6 IMF, World Economic Outlook, Transitions and Tensions, October 2013, Table
1.1; European Commission, European Economic Forecasts Autumn 2013,
European Economy, 7/2013.
7 European Commission, Europe 2020. A strategy for smart, sustainable and
inclusive growth, COM(2010)2020, Brussels, 3 March 2010.
8 European Commission, Six-pack? Two-pack? Fiscal compact? A short guide to the
new EU fscal governance,
Structural reforms are urgently needed and unavoidable in
indebted countries in order to improve productivity and
to increase competitiveness. However, the positive results
of these reforms will only be achieved in the medium- and
long-term. In order to truly overcome the crisis, it is neces-
sary to initiate a new phase of growth and to promote an
increase in employment by linking a policy of fscal consol-
idation in each member state with the immediate creation
of a European Fund for Growth and Employment. Tis
course of action would help member states continue along
the path toward fscal consolidation, while simultaneously
supporting growth and investments through a European
Te main goals of the investments of the Fund should be
to complete and upgrade the existing European infrastruc-
ture network (energy, transport, and broad-band) and
to promote technological innovation within a European
economy that has now reached the technological frontier

and needs a new growth spurt to compete successfully on
the world market. Huge investments from both the public
and private sectors are needed to meet the infrastructure
challenge. Te European Commissions preliminary esti-
mates point to investment needs between 1.5 trillion and
2 trillion in the energy, transport, and ICT sectors. 550
billion will be needed for the implementation of the Trans-
European Transport Network (TEN-T) program, of which
215 billion are needed for the removal of the main bottle-
necks in the transport core network. In the energy sector,
the expenditure needs amount to 400 billion for distribu-
tion networks and smart grids, another 200 billion are
needed for transmission networks and storage, as well as
500 billion to upgrade and build new generation capacity.
Finally, between 180-270 billion in capital investment is
required to bring wide and ultra-wide broad-band to all
European households.
Te Fund could immediately start to fnance related
projects, while also developing strategies over the medium-
term to improve the competitiveness of the European
economy through investments in higher education,
research, and technological innovation. A smaller part of
the Funds capacity could be used to support structural
reforms in member states that enter into arrangements of
a contractual nature with EU institutions through limited,
temporary, fexible, and targeted fnancial incentives the
Convergence and Competitiveness Instrument suggested
9 D. Acemoglu, P. Aghion, F. Zilibotti, Distance to Frontier, Selection, and Economic
Growth, Journal of the European Economic Association, pp. 37-74, March 2006.
Foreign Policy Program
Policy Brief
The driver of growth should
become public investments, with
a positive short-run impact on
demand, but also on long-run
growth through an increase in
potential output.
by the Commission in its Blueprint for a Deep and
Genuine EMU.
A traditional policy based only on the support of consump-
tion demand would be insufcient. A new phase of growth
in the European economy should be initiated by promoting
a sustainable development model. Te driver of growth
should become public investments, with a positive short-
run impact on demand, but also on long-run growth
through an increase in potential output. It should be the
declared goal of the Fund to improve European citizens
quality of life and to raise the productivity of European
frms. Tis should be achieved through increased spending
on frontier research and higher education, by strength-
ening the aforementioned infrastructural networks, as well
as through the promotion of energy efciency and the use
of renewable energy sources.
Financing the Fund
How should such a fund be fnanced? To answer this
question, let us turn to the proposed European Financial
Transaction Tax. On January 22, 2013, the Council adopted
a decision authorizing 11 member states to proceed with
the introduction of a Financial Transaction Tax through
Enhanced Cooperation, and on February 14, 2013. the
European Commission put forward a proposal for a
Council Directive implementing Enhanced Cooperation
in the area of Financial Transaction Tax (FTT).
It would
10 European Commission, A blueprint for a deep and genuine economic and
monetary union. Launching a European Debate, COM(2012)777fnal, Brussels,
November 28, 2012.
11 European Commission, Proposal for a Council Directive implementing
enhanced cooperation in the area of fnancial transaction tax, Brussels,
14.2.2013, COM(2013) 71 fnal.
make sense to devote the revenue of this tax directly to
the European level, since European fnancial markets are
unifed according to European rules. Te Commission
projects that annual revenues from the FTT, if imple-
mented only by the 11 countries (a number that could
subsequently be extended to all of the eurozone member
states), could amount to 30-35 billion.
Tese resources
would allow for the launch of a euro project-bond issuance.
Te European Investment Bank (EIB) could be entrusted
with the analysis and evaluation of proposed projects, as
well as with the pursuit of additional private sector support
and potential funding by the EIB itself. In this way, at least
300-500 billion could be spent in three to fve years by the
Fund for a multi-annual program of investments.
An additional resource could be guaranteed by the
approval of the proposal of a Directive, recently put
forward by the European Commission, related to the intro-
duction of a carbon/energy tax, whose revenue has been
estimated to amount to 39.6 billion.
If these resources
are attributed, at least in part, to the new Fund,
it would
be possible to launch a recovery plan amounting to invest-
ments equal in the short- to medium-term to at least 1
percent of euro area GDP.
From the Fund to a Eurozone Budget
Te Fund does not represent the fnal endpoint of a polit-
ical initiative. Instead, it represents an intermediate step,
opening the way to a new era of reforms in the EU starting
in the euro area that could culminate in an efective federal
structure. It should thus be followed by an attempt to
achieve agreement between all member states of the euro
area on new resources that could be targeted to fnance a
eurozone budget supplementary to the larger EU budget.
If all member states of the euro area agree to the introduc-
tion of the FTT and to assign the revenue to the European
level, the Fund could efectively represent the genesis of
a supplementary budget for the eurozone. According to a
12 Financial Transaction Tax under Enhanced Cooperation: Commission sets out
the details,
13 A. Iozzo, For a European Sustainable Development Plan, Centre for Studies on
Federalism, Discussion Paper 02, October 2011.
14 European Commission, Smarter energy taxation for the EU: proposal for a
revision of the Energy Taxation Directive, Brussels, COM(2011) 168/3.
15 In view of the European Council of June 2013, four Italian federalist groups
sent a Memorandum to all the European authorities asking for the attribution
of the FTT revenue to a European Fund for Growth and Employment. See Centre
for Studies on Federalism, Memorandum for the European Council on 27-28
June 2013,
Foreign Policy Program
Policy Brief
As long as new resources and
expenditures are attributed to the
eurozone budget, the amount of
taxes charged by member states
should be reduced, so that fscal
pressure on European taxpayers
would remain unchanged.
recent proposal,
Article 136 of the Treaty on the Func-
tioning of the European Union (TFEU) could conceivably
be designed to address the issue of the pooling of resources
such as those deriving from the FTT and the creation of a
body responsible for managing them.
Tis article, which
introduces provisions specifc to member states whose
currency is the euro,
has already served as the legal
basis for the adoption of the treaty establishing the Euro-
pean Stability Mechanism adding a new paragraph to the
original text of the treaty. An adapted article would enable
the eurozone states to pool the revenue from the FTT and
to simultaneously entrust its management to an intergov-
ernmental body, following the experience of the European
Monetary Institute during the transition toward monetary
union. Te ultimate goal would then be to open the way
to the establishment and the functioning of a European
Such a eurozone budget should support the growth of
the European economy and, at the same time, absorb
the efects of asymmetric shocks to the member states by
holding a larger pool of resources than currently attrib-
uted to the European Stability Mechanism. Afer the time
needed to reach a political consensus, with the transition
from the Fund to a eurozone budget, a European Trea-
sury should be established to manage the budget under
the democratic control of the European Council and the
European Parliament. As long as new resources and expen-
ditures are attributed to the eurozone budget, the amount
of taxes charged by member states should be reduced, so
that fscal pressure on European taxpayers would remain
unchanged. At a later stage, savings achieved through the
pooling of capabilities and resources, for instance in the
area of defence policy, could further lower the tax burden
on individual member states.
16 G. Rossolillo, A Budget for the Euro Area: The Road leading to the Decisive Federal
Leap, The Federalist, 2013,
17 Secondary legislation could be used to introduce a rainy-day-fund (Article122.
136 and 352 TFEU) and a euro area budget could be established as part of the
larger EU budget (C. Allard et al., Toward a Fiscal Union for the Euro Area, IMF
Staff Discussion Note, September 2013, p. 24).
18 In order to ensure the proper functioning of economic and monetary union ()
the Council shall () adopt specifc measures () (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.
19 B. Barthalay, Une nouvelle donne pour lEurope, Puissance Europe, Paris,
2012. This proposal has been taken up by M. Aglietta T. Brand, Un new deal pour
lEurope. Croissance, euro, competitivit, Odile Jacob, Paris, 2013.
20 Some recent estimates indicate that total cost of non-Europe in the defense
feld may be up to 120 billion a year. See V. Briani-G. Chevallard, The Costs of
Non-Europe in the Defence Field, CSF-IAI, April 2013.
No taxation without representation is a fundamental
principle of democracy. Te Commission has correctly
stated that the progress towards a deep and genuine EMU
would over the medium term necessitate a structure akin
to an EMU Treasury within the Commission to organise
the shared policies undertaken with the common fscal
capacity to the extent that they imply common resources
and/or common borrowing.
Terefore, any new authority
charged with managing joint resources, like those in a
potential euro area budget, should be democratically
controlled by the European Parliament and the Council. As
Bruno Macaes writes,
Any progress towards a genuine fscal union would
have to include establishing a European treasury with
the power to raise taxes, the power to decide on how to
spend these monies, and the power to issue joint and
several guaranteed euro bonds. A federal fscal union
with a central authority having discretionary spending,
taxing, and borrowing powers would decisively move
the European Union towards a genuine political union
a supranational state, calling for the corresponding
democratic mechanisms necessary to ensure political

Similarly, a recent paper by the Directorate General of the
French Treasury underlines that the creation of a common
budget for the eurozone represents a medium term process
21 European Commission, A blueprint for a deep and genuine economic and
monetary union. Launching a European Debate, COM(2012)777fnal, Brussels,
November 28, 2012.
22 B. Macaes, Fiscal Union, Banking Union: Two Opposite Paths for Europe, The
EuroFuture Project, The German Marshall Fund, May 2013, http://www.gmfus.
Foreign Policy Program
Policy Brief
About the Author
Alberto Majocchi is a full professor of public fnance at the Univer-
sity of Pavia. He also teaches at the Universities of Venice, Varese,
LIUC, and the Katholieke Universiteit Leuven, and has been a visiting
professor at the Universities of Cambridge and York. From 1991 to
1993, he worked as a national expert for the European Commission
in Brussels. From 1995 to 1996, he served as the economic advisor to
the minister of the environment in Rome. He served as president of
the Institute for Studies and Economic Analyses in Rome from 2003
until 2010.
About GMF
Te German Marshall Fund of the United States (GMF) strengthens
transatlantic cooperation on regional, national, and global challenges
and opportunities in the spirit of the Marshall Plan. GMF does this by
supporting individuals and institutions working in the transatlantic
sphere, by convening leaders and members of the policy and business
communities, by contributing research and analysis on transatlantic
topics, and by providing exchange opportunities to foster renewed
commitment to the transatlantic relationship. In addition, GMF
supports a number of initiatives to strengthen democracies. Founded
in 1972 as a non-partisan, non-proft organization through a gif
from Germany as a permanent memorial to Marshall Plan assistance,
GMF maintains a strong presence on both sides of the Atlantic. In
addition to its headquarters in Washington, DC, GMF has ofces
in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and
Tunis. GMF also has smaller representations in Bratislava, Turin, and
that requires a step forward in the political integration to
ensure democratic legitimacy of the tasks attributed to the
European level.
However, at this point, we are unmistakably operating
outside the perimeter of the Lisbon Treaty. If the European
Fund for Growth and Employment represents the frst step
toward a eurozone budget, new rules regarding the collec-
tion of revenues and decisions regarding expenditures need
to be established. Te reforms described above will open
the way to the evolution of the EMU toward a full federa-
tion, initially in the economic and monetary feld, but
also eventually extending to other policy areas, including
defense and foreign policy.
23 Ministre de lconomie et des Finances et Ministre du Commerce
Extrieur - Direction gnrale du Trsor, Un budget pour la zone euro, Trsor-co
Lettre, n 120, October 2013.