Tag Archives: Economic Policy

Looking for the Philosopher’s Stone of Economic Governance Coordination

France and Germany proposed a new way forward for the coordination of economic governance in the European Union. The proposal may be ambitious in scope, but is minimal on detail – the leaked document contains one (1) page only. So how to interpret this?

First of all I am really surprised by the mentoring attitude of Merkel and Sarkozy at the European Council meeting. Wall Street Journal quotes Yves Leterme, the Belgian prime minister:

“There were 18, 19 countries who spoke up to make known their regret on the way it was presented and also on the content. It was truly a surreal summit.”

This misstep will obviously diminish the chance for quick success of the negotiations. Apart from the tactics, however, I am much more interested in the emerging legal obstacles to any compromise. The problem is that too much EU law stands in the way of the proposal in its present form.

The scope of the proposed measures is huge – raising retirement ages across the euro zone, abolishing indexation of wages to inflation, harmonizing corporate and other taxes and instituting a “debt brake” that limits the ability of governments to borrow to fund their spending. Nevertheless, France and Germany seem to believe that this can be done without a proper reform of the Treaties, in some sort of Schengen-like legal framework.

First it’s worth investigating whether the proposals can be introduced as an enhanced cooperation (art. 326 – art. 334 TFEU). Such cooperation must not undermine the internal market or economic, social and territorial cohesion. It must not constitute a barrier to or discrimination in trade between Member States or distort competition between them (art. 326 TFEU). These legal restrictions must be interpreted carefully, and a program to raise the competitiveness of certain Member States may well violate them. An enhanced cooperation also involves a proposal by the Commission and the consent of the European Parliament. It’s approved by the Council with a unanimous vote (art. 329, para. 2 TFEU).

But another way forward may be a Schengen-like legal framework, initially external to EU law. In this case, however, I believe that it must also comply with the criteria set for enhanced cooperation – i.e. it should not undermine the internal market or economic, social and territorial cohesion, and it should not distort competition between Member States. These criteria will be difficult to meet provided that the very purpose of the measures is to improve the competitiveness of the participating Member States. Additionally, it looks like France and Germany do rely on the Commission and the European Systemic Risk Board to perform some functions in this new framework. I can’t imagine how this can be done without someone (for example, the UK), raising the question of the funding of such initiatives by the EU budget. The European Parliament could also have some objections to this.

The most likely (and the slowest) option is Treaty revision. It is also the most legitimate way forward (and maybe the only legal one). True, it would lead to a lot of bargaining and time loss, but it would also bring stability and legal security to this new framework.

Having said this, it’s obvious that some measures must be taken. It’s just that proposing measures without thinking about their legal ramifications is not a good sign for their success. After all, we are talking about unprecedented levels of economic governance coordination. Trying to circumvent Treaty reform may not work simply due to the scale of the proposals.

 

 

The Bulgarian Problem of the European Union

The European Union has a big problem with Bulgaria, and may not know it. Here is why.

The purpose of the International Civic and Citizenship Education Study (ICCS) is to investigate the ways in which young people are prepared to undertake their roles as citizens in a range of countries. The study includes all students enrolled in the grade that represents eight years of schooling, provided the mean age at the time of testing is at least 13.5 years. The results from the study are out, and they paint a bleak picture for Bulgaria.

But here I will focus on only one particular finding. Two thirds of eighth graders in Bulgaria may prefer to live permanently in another country. Two thirds of all young Bulgarians at the age of 13-14 that is.

Now, a lot can be said about the implications of this result for the overall demographic development in Bulgaria. The trouble is that even today Bulgaria is aging at a very fast pace. In fact UN data shows that in 2050 the overall dependency ration in Bulgaria will almost double from its 2010 levels. Population will decrease from 7,5 million to 5,4 million. But that is a conservative assessment based on current demographic trends and excluding serious migration movements out of the country. Yes, the intentions of 14-year olds are probably not the best indication of future demographic development, but they certainly give us a warning signal.

Let us not forget that only in a few years all labor restrictions for Bulgarians in the European Union will be lifted. Many EU countries are aging at a fast pace, and their labor markets will welcome Bulgarian migrants.

So far, so good. But these migrants will leave behind an almost dysfunctional pension system, a rapidly ageing society and bleak economic prospects for the young people remaining in Bulgaria. At that point Bulgaria can become a real problem for the European Union due to its failing budget, expansion of poverty (especially in old age groups and the Roma population), and not least – all kind of criminogenic social disturbances.

Obviously we cannot stop young Bulgarians from emigrating if they want to. What they need is sound education and good job prospects in Bulgaria. What they don’t need is escalating government costs, and hence – escalating taxes and social security contributions. Bulgaria finds it difficult at the moment to provide quality education to its children, and is, frankly speaking, quite incapable of developing a robust, sustainable economic system. That is why external help, and probably political pressure, are needed. The prospects for the Bulgarian economy are worsening by the day, and a lot must be done to convince our few children to stay at home.

Commission Proposals on Enhancing Economic Policy Coordination

The Commission has presented its communication on enhancing the coordination of economic policy in the European Union. The main components:

An alert system, including a set of indicators revealing external and internal imbalances combined with qualitative expert analyses. Alert thresholds will be defined and announced for each indicator. In particularly serious cases, the Commission would recommend placing the Member State in an “excessive imbalances position”.

An enforcement mechanism – a Member State in “excessive imbalances position” would be subject to stricter surveillance. The Council would issue policy recommendations; more stringent rules would apply to euro area Member States. By end-September, the Commission will make formal proposals for secondary legislation establishing a framework for dealing with excessive imbalances.

Thematic structural reform surveillance – this surveillance will be carried out in accordance with Article 121 and 148 TFEU and on the basis of the Europe 2020 Integrated Guidelines. . Based on Member States’ National Reform Programmes the Commission will assess the way each country has addressed the bottlenecks it has identified and how it is progressing towards its national Europe 2020 targets.

Reforms of national fiscal frameworks – including fiscal rules and credible enforcement mechanisms; multi-annual budgetary planning.

Enforced Stability and Growth Pact – requirement for Medium-Term budgetary objective (MTO) for Member States with a level of debt or pronounced risks in terms of future debt developments; a clear and simple numerical benchmark for defining a satisfactory pace of debt reduction.

Appropriate sanctions and incentives – an interest-bearing deposit for euro area Member States; ex-ante conditionality linking disbursement of cohesion policy support to structural and institutional reforms; reduction of EU funds payment to Member States or payments for which Member States act as an intermediary (end beneficiaries should not be affected).

The coordination cycle – complementarity of national budgets will be ensured at European level through policy guidance before final decisions on the budget for the following year are taken in Member States. The so-called European Semester will start with an “Annual Growth Survey” prepared by the Commission. By February the European Council provides strategic guidance on policies, which is taken into account by Member States in their Stability and Convergence Programmes (SCPs) and National Reform Programmes (NRPs)which will be submitted in April. The Council issues country-specific policy guidance in early July. In the second part of the year, Member States finalise national budgets. The European Semester will cover all elements of economic surveillance, including policies to ensure fiscal discipline, macroeconomic stability, and to foster growth, in line with the Europe 2020 strategy.

The Commission Proposals for Coordination of Economic Governance

The Commission has issued a communication on reform of economic governance in the eurozone, called “Reinforcing economic policy coordination”. EUobserver reports that the proposals have drawn an immediate rebuke from Sweden.

Here’s a list of major proposals:

Improving the functioning of existing mechanisms under the Stability and Growth Pact

• Increase effectiveness of Stability and Convergence Programmes assessments through better ex-ante coordination, including competitiveness developments and underlying structural challenges. This will be done by a scoreboard with details on developments in current accounts, net foreign asset positions, productivity, unit labour costs, employment, and real effective exchange rates, as well as public debt and private sector credit and asset prices.

• National fiscal frameworks to better reflect the priorities of EU budgetary surveillance. This would include formulation of more timely country-specific recommendations, a system of early peer-review of national budgets, a horizontal assessment of the eurozone fiscal stance

Addressing high public debt and safeguarding long-term fiscal sustainability

• Give new prominence to the debt criterion of the Treaty. Conditionality would typically involve an appropriate mix of fiscal consolidation and the strengthening of fiscal governance including tax policies; financial sector stabilisation to the extent that financial sector distress is at the root of the public finances problems; and broader policy interventions to restore macroeconomic stability and external viability.

• Take better account of the interplay between debt and deficit

Better incentives and sanctions to comply with the rules of the Stability and Growth Pact

• Interest-bearing deposits in case of inadequate fiscal policies

• More rigorous and conditional use of EU expenditure to ensure better compliance with the rules of the Stability and Growth Pact

• Recurrent breaches of the Pact to be subjected to more speedy treatment and more rigorous use of the Cohesion Fund Regulation

G-20 – What Economic Decision-Making?

It is said that the Group of 20 (G-20) is set to become the premier coordinating body on global economic issues. But what does it mean?

Indeed, the summit statement says that G-20 is “to be the premier forum for our international economic cooperation”. The statement outlines three areas of cooperation:

  • G-20 members will agree on shared policy objectives;
  • G-20 members will set out medium-term policy frameworks and will work together to assess the collective implications of national policy frameworks;
  • G-20 Leaders will consider, based on the results of the mutual assessment, and agree any actions to meet common objectives.

The G-20 is perceived as an efficient forum that now allows for the inclusion of developing countries in the global economic and financial governance. One of the most important tasks ahead of G-20 appears to be the reform of the International Monetary Fund (IMF) and other global financial institutions.

Other experts, however, claim that the process of reform cannot be restricted to the G-20 or similar associations that exclude so many of the world’s countries. That is why G-20 cannot replace a fully legitimate and universal international organization, such as the IMF.

An additional critique is that large countries like Bangladesh or Nigeria are missing and that Europe is over-represented in the G-20 forum—which cripples democratic representation .

2009 EU Report on Public Finances

The new, 10th edition of the report Public Finances in EMU – 2009, has been published.

The report says that public finances in the EU have come under unprecedented stress as they play a central role in overcoming the financial and economic crisis.

The report summarizes the measures under the European Economic Recovery Programme (EERP). According to the report, automatic stabilizers due to larger government spending in the EU and particularly the more extensive social security systems than in the US, have contributed support to the EU economy.

The public debt-to-GDP ratio in the EU is expected to jump by 21 percentage points to 79.4% of GDP until 2010. The expected sharp budgetary deteriorations and increases in public expenditure-to-GDP ratios, in addition to pressures on many Member States’ public finances from rising age-related spending, will eventually require tough choices with a view to maintaining long-term sustainability.

The authors of the report believe that the Stability and Growth Pact contains the sufficient flexibility to cope with the unprecedented challenges of the crisis while at the same time providing a framework for future consolidation strategies.