EU Fiscal Policy in the Age of Turbulence: Will the Lisbon Strategy Survive It?.

We provide a detailed examination of the impact of the crisis on EU fiscal policy and the compatibility of the fiscal stimulus with the Lisbon agenda. We show how the conventional wisdom behind the EMU (discretionary fiscal policy should not be used as a tool to stabilize output over the cycle, with the stabilization role being normally left to monetary policy) has been reverted due to the peculiar aspects of the current crisis: a liquidity crisis transformed into a solvency crisis with ensuing consequences in terms of the drying up of credit for new investments, and hence low growth rates in the medium run, making monetary policy of limited use in stimulating the economy. We emphasize however that the problems of discretionary fiscal policies are not overcome, in terms of information, decision and implementation lags. It follows that that the structure of national incentives for national governments might not be in line with EU-wide needs, the ideal solution being a federal set-up for fiscal policy and deficits in the Union’s budget. As this is clearly not possible within the current institutional context, we suggest multilevel coordination of economic policy actions: a strengthened role for the Eurogroup (also used more frequently at the head of state and government levels); a clear link between fiscal policy actions and the Commission’s annual monitoring of the Lisbon Agenda; some explicit form of centralization of fiscal policy at the EU level, and namely the possibility to raise EU-level debt managed by the EU institutions.[...]