Never Waste a Good Crisis? On the Emergence of an EU Fiscal Capacity

The European sovereign debt crisis and the Covid-19 pandemic have arguably led to a transformation of the Economic and Monetary Union (EMU) that is ongoing, albeit this was almost always not reflected in the text of the EU Treaties. The measures adopted in response to the two crises were either aimed at or nevertheless had the effect of addressing some of the glaring omissions in the EMU framework. The question that this contribution seeks to answer is whether the two crises have given European integration a significant and lasting impulse towards a greater fiscal capacity or even a fiscal union in the Euro area. To this end, the benchmark is first defined: what exactly is meant by fiscal capacity and fiscal union, as well as what instruments are linked thereto (section II). Thereafter, a brief account is given of the status quo prior to the two crises (section III). This is followed by an analysis of the measures taken in response to the sovereign debt crisis and, subsequently, the Covid-19 pandemic (section IV). It will be argued that, while certainly not providing a permanent solution to the EMU’s shortcomings, the measures that were taken to address the economic impact of the Covid-19 pandemic are geared towards the (temporary) increase of the budgetary capacity of the EU on the basis of centralized debt issuing, and include crisis management tools that specifically aim to deal with asymmetric shocks. The two major crises may have given European integration a significant impulse towards a greater fiscal capacity by contributing to its major building blocks, notably in light of what these measures may foreshadow. We conclude with a forward-looking discussion on the other, missing elements for the creation of a greater fiscal capacity and a more complete fiscal union, whilst noting that risk-sharing mechanisms in the EMU remain work in progress (section V).