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Local and regional leaders support strengthening euro area fiscal capacity  

A fully-fledged Banking Union and a strong fiscal capacity of the Economic and Monetary Union are necessary tools to support investment and safeguard potential growth, productivity and competitiveness in times of economic crisis, European local and regional leaders emphasise. The Members of the European Committee of the Regions (CoR) adopted the opinion "Fiscal capacity and automatic stabilisers in the EMU" by Halmstad Municipal Councillor Carl Fredrik Graf (SE/EPP). The major concern is the growing economic gap between regions.

During the global financial and economic crises the Economic and Monetary Union (EMU)* exposed its vulnerability leading to excessive debt levels and the sovereign debt crisis in Europe. Even though Member States and EU institutions have taken series of steps to reduce risk and improve the coordination of national fiscal policies, the measures have not sufficiently enhanced the national capacity to absorb economic shocks, prevented the shrinking of investment or triggered growth-enhancing, sustainable and socially balanced structural reforms.

"The crises made clear that more has to be done for the countries sharing a currency, especially to break the negative circle between national finances and banks. A completed Banking Union is the most effective instrument to make the financial sector more stable and to minimise the negative effects of economic shocks by centralised rules and supervision in the euro area", says Carl Fredrik Graf (SE/EPP), member of the Halmstadt Municipal Council.

Experience during the crisis years has shown that cutting investment is very often easier than cutting current operational expenditure, resulting in a major reduction in public investment at the cost of competitiveness and the ability to grow. "This has especially hit local and regional governments who are responsible for over 60% of public spending and over 50% of public investment. As a result of the cuts, regional economic disparities between and within Member States have intensified", explains Graf.

As the economic crisis impacted different regions differently – via the so called asymmetric shocks** – local and regional leaders find that an improved fiscal capacity could help regions adversely affected by the shocks. This would enable the EMU to provide immediate stabilisation in the event of emergencies by transferring funds. However, local leaders stress that such fiscal capacity should be complementary to Cohesion Policy and other financial instruments, respecting the subsidiarity principle and should be flexible enough to implement policies appropriate to local needs.

The Members emphasise the need for safeguards to prevent permanent transfers and moral hazards. "Member States as well as local and regional authorities need to demonstrate responsible economic policies and fully implement structural reforms as a precondition to gain access to the European economic stabilisation instruments. The best way to prevent one-way flows between countries is without question more economic and social cohesion and the strengthening of good governance", says Graf.

The negative effects of the crises are still strongly felt by cities and regions. The Members stress that a high level ownership is essential for the success of structural reforms and call for all relevant levels of governance to be included in the discussion and introduction of new instruments like automatic stabilisers to soften the impact of asymmetric shocks.

Note to the editors

*The Economic and Monetary Union (EMU) involves the coordination of economic and fiscal policies, a common monetary policy and a common currency, the euro. Whilst all 28 EU Member States take part in the economic union, some countries have taken integration further and adopted the euro as their common currency.

**Asymmetric shocks are a change in microeconomic conditions that affects different countries or parts/regions of a country differently. This is often a source of problems for countries that share a common currency, such as the Euro Zone, as the ability to alter national exchange rates or to conduct a country-specific monetary policy no longer exist.

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Carmen Schmidle
Tel. +32 (0)2 282 2366

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