The German chancellor Merkel and the French president Sarkozy met yesterday and produced this document outlining their new proposal for the reform of the eurozone economic governance. The main points are:
- Regular meetings of the eurozone heads of state and government twice a year;
- President of the eurozone coinciding with the president of the European Council;
- Reinforcing the powers of the eurogroup of finance ministers (whatever that means);
- All Member States of the euro area to incorporate a balanced budget fiscal rule into their national legislation by the summer of 2012;
- All Member States of the euro area should confirm without delay their resolve to swiftly implement the European recommendations for fiscal consolidation and structural reforms;
- Finalizing the negotiation on the Commission’s proposal on “a common consolidated corporate tax base” before the end of 2012;
- Macro-economic conditionality of the Cohesion fund should be extended to the structural funds;
- Joint Franco-German proposal on a Financial Transaction Tax by the end of September 2011.
So how to interpret this proposal? I will divide my analysis in two parts: 1. Efficiency to solve the urgent problems of the eurozone and 2. Long-term institutional considerations.
1. Efficiency to solve the urgent problems of the eurozone
This proposal will not solve the urgent problems of the eurozone. It is far from what is necessary to calm the markets and will not help neither the ECB, nor Italy and Spain. While Merkel and Sarkozy did touch upon the creation of a eurozone bond as a distant possibility, they did not make a positive step in this direction. This happens while many experts claim that only two options remain open – the creation of a eurozone bond or the breakup of the eurozone. I firmly believe that a eurozone breakup will be a huge blow to the whole world economy, and some research supports this view. That is why any further dodging of this issue will only add to the damage to the eurozone economy.
2. Long-term institutional considerations
Looking carefully at the Franco-German proposal, there is nothing really new that is being added to the Pact for the Euro. The common consolidated corporate tax base and the financial transaction tax (Tobin tax) are old ideas, and they are being drafted by the Commission. The “eurozone economic government” is nothing more than a high-level political meeting with unclear powers, but probably within the framework of the Euro Plus Pact. The “president” of the eurozone probably adds some weight to the position of the president of the European Council, but again his/her powers are not clearly defined and would probably only deal with coordination.
What is more troubling is the intrinsic logic of these proposals. They stay within the logic of intergovernmentalism, leaving all the important decisions to an intergovernmental body. This is a recipe for failure. It’s infuriating that after sixty years of supranational regulation we resort to an inefficient mechanism that remains prone to the joint-decision trap. We are curing the problem with more of the same, and this will lead to deepening of the problems. If we want to keep the eurozone intact we must give an independent body – the European Commission or another entity, the power to sanction Member States for their infringement of the budgetary discipline “golden rule”. Any other solution will not work precisely the way the current mechanism for ensuring budgetary stability in the eurozone does not work.
This intergovernmentalist trend must be stopped. Nobody believes that the Member States are able to control each other. If we want the integration process to continue, we need to take into account its inherent logic. Otherwise we will only breed hybrids that will live shortly and leave a mess behind.
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged common corporate tax base, competitiveness, coordination, Economic Governance, European Stability Mechanism, eurozone, flexicurity, France, Germany, Pact for the Euro, pension system, Public Finances, Taxation
Today EU leaders will discuss a very important proposal put forward by France and Germany. It’s all about fiscal supervision and bail-outs, and the question is whether an amendment of the Treaties is necessary or not. Germany insists that a credible system of fiscal monitoring needs a credible sanctioning mechanism in order to keep EU Member States’ spending in check. To do that, Germany proposes the introduction of new texts in the Treaties. In exchange Germany would support a permanent bail-out mechanism. But it turns out that many are opposed to this proposal.
A number of media (EUobserver, Euractiv, FT’s brusselsblog) report that a number of Member states are very critical of the proposal. Viviane Reding has called the plans “irresponsible” and has been immediately reprimanded by France’s State Secretary in charge of European affairs, Pierre Lellouche. But that’s another story.
The important debate here is not whether an amendment is achievable in the medium term (it will probably be put to referendum in Ireland and possibly the UK and Denmark). The conceptual shift in the coordination of economic governance is where interests of Member States diverge.
Germany wants to impose strict fiscal discipline on all eurozone members, including the possibility of removing a Member State’s voting rights. But many argue that such budget austerity may not be the solution to the problem. George Soros himself has compared the proposals to the 1930s, where some countries became overly focused on balancing budgets during a depression. Other go further and note that it is Greece, in fact, which is bailing out Germany – in the form of an annual trade deficit that has averaged 5 billion euros, stimulating German jobs but destroying them in Greece. That is why many economists advocate for measures to stimulate demand in trade surplus countries – Germany, Netherlands, Denmark, etc.
Axel Weber, president of the German national bank, disagrees. He says that the proposal of raising wages to support domestic demand and reduce competitiveness neglects that wages are not a political control variable. Moreover, according to him simulation studies show that the effects would be confined almost entirely to the home economy in the form of changes in employment.
So who’s got it right? I’m not sure, and I am (thankfully) not an economist. But the German position will not be easy to defend unless it addresses the concerns about German policies that stimulate the aggregation of a trade surplus.
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged amendment, bail-out, Economic Governance, excessive deficit procedure, fiscal policy coordination, France, Germany, sanctions, trading surplus, Viviane Reding
The Van Rompuy task force on economic governance has produced its report that will be discussed during the European Council meeting on 28 October. According to Mr. Van Rompuy this will be the biggest reform of the Economic and Monetary Union since the euro was created.
The most important provision is about creating a mechanism for macro-economic surveillance. The mechanism will serve as an early warning system for detecting substantial macroeconomic imbalances, including strong divergences in competitiveness. The mechanism will operate for eurozone member states.
The second reform concerns the corrective arm of the Stability and Growth Pact. The debt criterion will carry much more weight when deciding on the excessive deficit procedure. According to Euractiv the task force has also endorsed plans for an interest-bearing fine on countries with high debts. The task force has also endorsed the European Semester for the coordination of budget planning.
The new proposals may need the revision of the Treaties. Le Figaro reports that France and Germany have agreed on such a revision in 2013 (hat tip: OpenEurope).
In summary, the report of the task force will generally repeat the proposals of the Commission on European economic governance. The big question, however, remains – will these proposals suffice to reverse current macroeconomic imbalances in the eurozone and the EU in general. Economists remain sceptical, and if we do not manage those imbalances, all other political measures will have only incremental value.
A new trend in the institutional dynamic of the European Commission is evident: its independence, enshrined in the Treaties (art. 17, para 3 TEU; art. 245 TFEU) is waning. The EUobserver reports:
“A group of EU commissioners from smaller Member States is growing increasingly angry with a number of their larger-state colleagues, perceiving their actions as being driven by national interests rather than the greater European good.”
This is a really worrying sign. True, the Commission has often been suspected in the past of succumbing to pressure from larger Member States. And the very procedure of election of commissioners is, after all, subject to compromise by the governments of the Member States themselves. But the independence of the Commission is not a joke, and the repercussions can be very harmful.
But why do we need an independent Commission in the first place? Well, the independence of the Commission is at the heart of the integration method (called, at least until now, the “Community method”). The independence of the Commission guarantees a more objective approach to the integration process that is removed from the political concerns of the separate Member States. That is why the Commission is entitled with exclusive right of legislative initiative. It also implements EU legislation at the Community level and monitors the implementation of EU law at national level by Member States. In other words, the independence of the Commission guarantees that Member States will not be able to bend the integration process in the direction of their own, singular interests.
Now, if some commissioners start to defend the singular interests of the Member States that they come from, we are in trouble. Once the suspicion spreads (as it is spreading right now), all Member States will try to project their interests to the Commission by pressuring their own commissioners. This will destroy the credibility of the Commission, and is also illegal.
In fact at least one author – Jean-Paul Jacqué, has warned that there is a danger of the Commission becoming an intergovernmental institution which is in competition with the Council. One of the checks against this danger has been the empowerment of the European Parliament, but it cannot be expected to mend the problem. The Commission President should work hard to dispel suspicions of wrongdoing, and if necessary – to request the resignations of certain commissioners. Member States should also refrain from unduly pressuring the Commission as in the case of the Roma expulsions from France.
The alleged breach of the principle of independence of the Commission is the most dangerous challenge to the European integration in recent times. Keeping in mind that the European Union is to get new powers of economic governance, such a suspicion can indeed derail the whole integration process once the really tough disputes start.
The European Commission has now formally proposed amendments to existing legislation and new legislation aimed at improving economic governance.
Here’s the list:
1.A Regulation amending the legislative underpinning of the preventive part of the Stability and Growth Pact (Regulation 1466/97);
2. A Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (Regulation 1467/97);
3. A Regulation on the effective enforcement of budgetary surveillance in the euro area;
4. A new Directive on requirements for the budgetary framework of the Member States;
5. A new Regulation on the prevention and correction of macroeconomic imbalances;
6. A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area.