Tag Archives: Economic Governance

The Missing Link in the Eurozone Governance Debate

The President of the European Council Herman Van Rompuy proposed a “crisis cabinet”. He said that “there is not much hierarchy or organic links between the main players and the main institutions”. The idea is to include the European Comission President Jose Manuel Barroso, the head of the European Central Bank Jean-Claude Trichet and Mr Van Rompuy himself in this “crisis cabinet”.

At the same time the President of the European Commission called Germany’s plans on improving economic governance in the eurozone as “naïve”. He believes that any treaty reform is not feasible in the moment.

To me it is apparent that the debate is triangular – among the Commission, the ECB, and the European Council, leaving one player out. The European Parliament, that is.

In a way this is understandable. Any further integration of economic governance will encroach on state sovereignty. That is why it is essential to have sound support in the Member States for any further reform.

Then again, the weak conditionality of the Stability and Growth pact, as negotiated by the Member States, failed to perform. Any coordination mechanism short of Treaty reform will probably go the same way. We can see this in the conceptual disputes between Germany and France during the years and even today.

True, the EP did have a debate on economic governance coordination last week. But did it really influence the debate in the EU? Did it reach the European citizens? I am not so sure.

The dark scenario is political divergence rather then convergence. This may well be happening, given some unilateral steps made by Germany. But it should not surprise us – governments do calculate their own tactical interest, betting against the other participants in the currency union. In fact, history is full of such examples where currency unions dissolute due to political disagreement.

The European leaders seem to believe that they can “fix” the eurozone on an intergovernmental level with the support of the ECB, preferably without introducing Treaty reform. It would be great, but it is not possible.

That is why it would be much, much better if the European Parliament had a stronger voice in the debate. It is in the moment the only institution that can provide a forum for open deliberation of diverging political ideas for reform.

On a bitterer note – Member States may well circumvent the public discussion, but they will not fool the markets.

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