Rationale behind a euro area “fiscal capacity”: Possible instruments including a dedicated budget

The sovereign debt crisis exposed weaknesses in the economic and monetary union (EMU), the integration process that brought the creation of the euro. Member States and EU institutions have taken several measures to tackle these shortcomings, including stricter rules on economic governance and setting up the European Stability Mechanism. Ideas to further strengthen EMU include the creation of a specific "fiscal capacity" for the countries that have adopted the single currency. In the longer term, this could lead to the establishment of a euro area budget.

In 2012, policy documents from EU institutions envisaged steps towards fiscal union, coupling budgetary discipline with solidarity tools. Two main functions are identified for an EMU fiscal capacity: 1) promoting structural reforms; 2) mitigating macro-economic shocks which affect only some euro-area countries.

The debate is now focusing on a "convergence and competitiveness instrument" (CCI) that would aim to address the first objective. A CCI would encompass both "contractual arrangements" through which Member States commit themselves to key structural reforms and financial incentives to facilitate the implementation of those reforms.

Proper democratic scrutiny of EMU economic governance, with new measures in this area possibly having implications for the European Parliament, is also central to the discussion.