The European Monetary Union after COVID-19: Towards Fiscal Integration Aligned with Monetary Policy

Within the Economic and Monetary Union (EMU) of Europe the responsibility for the single monetary policy lies with the European Central Bank (ECB). By contrast, economic policies remained national and must therefore be coordinated to ensure the proper functioning of EMU. A central government that could have taken measures to reduce the burden on monetary policy to stabilise the eurozone in the more challenging economic and financial circumstances since 2008 was and still is missing.

This paper argues that euro area governments could build on the cooperative model of Europe’s economic response to the COVID-19 pandemic to establish a permanent fiscal framework alongside monetary policy that is more similar to those found in other currency areas. First, they could create a central fiscal capacity to ensure a euro area economic policy stance that is consistent with the orientation of monetary policy. Second, member countries could introduce a safe sovereign asset for the eurozone in order to anchor financial integration and facilitate the implementation of monetary policy. Third, euro area governments could commit when necessary to recapitalise their NCB and (indirectly) the ECB to underpin the credibility of large central bank balance-sheet operations.

Taking these three steps towards fiscal integration aligned with monetary policy and in full respect of the ECB’s political independence would reduce systemic risks and strengthen confidence in the euro.