On January 21st, 2015, the strict monetary austerity regime of the Euro Zone (EZ) was officially abandoned as the European Central Bank (ECB) launched the Quantitative Easing (QE) programme of State bonds purchases on secondary markets. The European Court of Justice’s attorney general has certified that the QE programme is not in contrast with the EZ Treaties, but it certainly breaches the established interpretation regarding the latitude of the ECB room of manoeuvre within its mandate. In November 2014 the newly appointed European Commission has launched an investment programme, the most significant impact of which is the message that, in principle, there can be a common pool of resources for governments to spend off the books of the Excessive Deficit Procedure. Also, the “flexibility” issue raised by Italy and France regarding timing and extent of application of the fiscal rules vis-à-vis contingent macroeconomic conditions is no longer taboo, and a few steps forward have been made in that direction (albeit the pro-cyclical maze of rules rests untouched). And of course, a major political change took place inGreece which may affect the whole ofEurope. These seeds of regime shift come from overwhelming pressure of economic, social and political crises all acrossEurope, a widening divergence of policy strategies with major partners and official institutions outside the EZ, and the rapid decline of support for the austerity doctrine from leading academic schools outside the “German block”.
Is the European austerity doctrine dead, and can we forget about it? Not quite. We all understand that a fast boost to economic activity in the EZ cannot only come from monetary QE plus sparse domestic fiscal stimuli, whatever is the fiscal space to which each government is constrained by the Fiscal Compact or by investors. As argued by President Draghi at Jackson Hole, the road towards a satisfactory recovery rate in the EZ can only be opened by fiscal and monetary coordination at the EZ level, and this can only be accomplished if a fiscal stimulus is coordinated across countries from Brussels. This view calls into question the design of the economic governance of the EZ, of which the austerity doctrine is as yet one of the pillars.
What can, and should, genuine reformers do? As in any high politics operation, a unique combination of vision, determination and brinkmanship is needed. First, to conquer mutual trust, it should be clear that the reform will not be a tricky system of bypasses of the fiscal responsibilities, sovereignty limitations, and economic reforms that are necessary to live and prosper in Europe. Second, the “democratic deficit” of European institutions at large should be taken very seriously: fiscal policy cannot and should not be delegated to technocratic entities or to pseudo-fixed rules. Fully fledged political and fiscal federalism can be shown to Pareto-dominate other institutional arrangements in a monetary union with labour mobility and asymmetric shocks. However, within the present political constraints, the United States of Europe may well be a mirage, capable of entrapping the EZ in a dangerous status quo. What is urgently needed is an effective system of protection and stabilization against large economic and financial boom-bust cycles wisely articulated at the national and super national levels along the following lines.
1. Complete redesign of the fiscal regulation system: a) substitution of the “country-by-country” approach with a system oriented towards coordination of fiscal policies; b) removal of the apparatus of fixed rules on current fiscal budgets, in favour of direct monitoring of long-term sustainability of public debt; c) flexibility of long-term fiscal plans in relation to the business cycle, domestically and Union-wide, under peer monitoring and coordination; d) transfer of a few national fiscal competences (e.g. defence, supranational infrastructural investments, automatic stabilizers, such as unemployment benefits) to the Union’s budget, under the control of the European Parliament, which may be the germ of a fiscal union.
2. Institution of a newly conceived “Ecofin 2.0”, a board of national fiscal authorities with a clear mandate to implement the new fiscal rules and coordinate Union-wide fiscal policy in view of stabilization of the aggregate business cycle vis-à-vis the monetary policy stance of the ECB. The board should also have a clear and transparent agenda and a system of majority voting. This does not guarantee that the divergent policy interests of the German block with the rest of the EZ can be overcome, but that, as it happened with the ECB architecture, negotiations will be clear and transparent, not predetermined under the shield of fixed rules, so that alternative views may have a chance.
3. Realignment of the ECB statute and latitude of competences in line with those of standard central banks in developed countries (remove prohibitions that are not enforceable when they may endanger the stability of the system).
Last but not least, genuine reformers will need the credible determination to present all the others with a clear-cut alternative: either a serious reform is started here and now, with all the necessary ingredients, those which the South dislikes as well as those which the North dislikes, or everyone will have to take its own share of responsibility in saying ‘No’ to the European economic and monetary union.
 Baglioni A., Boitani A., Bordignon M. (2015), “Labor Mobility and Fiscal Policy in a Currency Union”, CESifo Working Paper No. 5159, January 2015