Fiscal and Macro-structural Challenges and Policy Recommendations for the Euro Area and Its Member States under the 2014 Semester Cycle

EXECUTIVE SUMMARY

This paper focuses on the need for euro area policy makers to sustain their recent crisis-induced reform eagerness to pull the region away from the threat of economic stagnation. The important policy challenge in ensuring that fiscal consolidation protects public investment spending is identified, and the to date erratic achievement hereof by member states is highlighted. It is suggested to amend the Macroeconomic Imbalances Framework with data series to highlight the importance of public investments to achieve this goal. Secondly, the need to overhaul national bankruptcy procedures to facilitate private debt deleveraging and ensure the reduction of financial fragmentation in the euro area is discussed. While the Banking Union puts in place several important new institutions to integrate the euro area banking system, it will need to be complemented with national bankruptcy reforms to achieve its goal of comparable lending rates throughout the euro area and help the euro area private sector reduce its debt load to restore economic growth.

The President of the Euro Group should be made a full-time position, and the post could have its democratic legitimacy enhanced through an expansion of the spitzenkandidat-framework to also include it. This could see the President of the Euro Group selected by voters solely in the euro area members, based on the identification of spitzenkandidaten by the political groupings in the European Parliament. This proposal would require that the variable institutional geometry of the EU be extended to also the European Parliament. It would have to create a new euro area-only institutional setting, including a new euro area-only committee in the European Parliament in front of which the President of the Euro Group could regularly appear. The President of the Euro Group should if member state achievement of SGP fiscal consolidation goals and implementation of CSRs is in doubt publicly present a list of required CSRs to be implemented if any fiscal target flexibility under the SGP is to be possible.