Intereconomics - Review of European Economic Policy
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Newsletter – Volume 53,
November/December 2018

The November/December issue of Intereconomics is dedicated to the Multiannual Financial Framework (MFF) of the European Union. We open this issue with an editorial on Italy's debt crisis and how it might be addressed. Our Forum examines multiple aspects of the upcoming MFF from rule-of-law conditionality, to tax-based own resources, the Common Agricultural Policy (CAP) and a new stand-alone heading in the EU budget, security and defence. Finally, our Letter from America considers the recent mid-term elections in the US and the impact they may have on the next two years of the Trump Administration's legislative agenda and the economy. We hope you enjoy this issue!

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Featured Topic

Looking at the EU Multiannual Financial Framework 2021-2027

In May 2018, the European Commission adopted the EU Multiannual Financial Framework (MFF) for the period 2021-2027 and presented it as “A Modern Budget for a Union that Protects, Empowers and Defends”. The new MFF has ambitious objectives despite the departure of its third largest contributor, the United Kingdom. The ongoing debate on the MFF reveals differences of opinion on various aspects of the EU – including its very foundation.

Friedrich Heinemann considers the founding principles of the Treaty on European Union (TEU), particularly Article 2 which lays out the shared values of the community, including respect for human rights, the rule of law and tolerance for minorities. Over the course of the last few years, numerous developments have tested this foundation, Heinemann writes. In the face of these challenges, it appears that some EU Member States no longer share the same basic common values. While it seems unlikely that Article 7 sanctions will be implemented, an intense debate continues about the possible introduction of a new type of conditionality in the next MFF through the withholding of EU funding.

This is a language that all EU Members understand. Margit Schratzenstaller argues that Members need to overcome what is called net position thinking i.e. that Member States primarily consider the difference between their EU budget payments and the transfers they receive out of them. They should instead take the European added value into account. Despite the departure of the UK, the MFF is set to increase substantially. This has been aided by some early reviews, for example, for the Common Agricultural Policy (CAP). The reviews, writes Alan Matthews, came out of the demand for simplification, the need for modernisation of the CAP and the timing of the budget process.

And last but not least – defence. Daniel Fiott lays out the future plans for the EU with regards to security and defence – which will become a stand-alone heading in the new MFF. This is quite noteworthy due to the fact that Article 41.2 of the TEU prohibits the use of the EU budget for defence reasons. The European Commission has requested 13 billion euros for defence research and capability development in a radical break from the past. This change in the MFF will lead the EU into a new era that is welcome to some, but unsettling to others.

A Closer Look

Italy: A Question of Interest Rates and Trust

Sergio Cesaratto argues that Italian public debt has had mainly to do with interest rate payments and conversely very little to do with fiscal profligacy. He rallies against what he sees as Europe's view that markets should be allowed to bring Italy to heel. His solution: allow interest rates on Italian public debt to fall, for example, to the French level. With sufficiently low interest rates, Cesaratto argues, stabilisation or even a slow, progressive reduction of the Italian public debt is consistent with a moderate fiscal expansion.

Tax-based Own Resources as a Core Element of a Future-Oriented Design of the EU System of Own Resources

There is a broad consensus among experts, says Margit Schratzenstaller, that the current structure of the EU budget is inadequate to cope with the long-term challenges confronting the EU. More needs to be done to address digitalisation, climate change and migration, among other issues. One way to do this is to create EU added value through the reform of the EU's own resources system. "Sustainability-oriented tax-based own resources would do more than just help to close the existing sustainability gaps in EU taxation," Schratzenstaller writes. It would act as a catalyst to secure net contributors' agreement to maintain or increase spending in exhange for far-reaching reforms that will enhance European added value.

Post-Midterms: What to Expect

The November 2018 midterm elections in the US did not produce the blue wave that some had predicted but they did flip the House of Representatives, thereby breaking the Republican's legislative stronghold. Jiffer Bourguignon considers the implications for the next two years of Trump's term leading up to the 2020 elections. What does the new configuration mean for the future of Trump's tax cuts, trade policy and the US economy? Are there opportunities for bipartisan cooperation or will the divide intensify? How will things play out as Trump makes his bid for reelection? For an indication, Bourguignon says, look to Trump's base.

In Our Upcoming Issue

The Intereconomics/CEPS Annual Conference Issue: Economic Convergence or Divergence in the EU?

with articles from conference participants Cinzia Alcidi, Christian Bodewik, Michael Burda, Mathias Dolls, Barry Eichengreen, Charles Wyplosz, and more


Quote of the Month

EU funds that promote economic convergence will hardly reach their objective in countries sliding toward a system that lacks effective checks and balances.


About Intereconomics – Review of European Economic Policy

Intereconomics is jointly produced by ZBW – Leibniz Information Centre for Economics and the Centre for European Policy Studies (CEPS). The journal appears bimonthly and features papers by economists that deal with economic and social policy issues and trends in Europe or affecting Europe. To submit a paper for publication, please visit the Submissions section of our website for relevant information.

Intereconomics is published by Springer-Verlag Berlin Heidelberg.

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