Tag Archives: fiscal policy coordination

The Old New Idea for a Political Union – Misunderstood?

The Greek financial crisis now threatens the whole eurozone. It appears that without substantial debt restructuring Greece is likely to default, and would have to leave the eurozone. This could lead, however, to substantial collateral damage and unintended effects for the whole European banking and financial system. The other option is a very large fiscal transfer from the eurozone core. This second option will lead donor Member States to demand substantial political guarantees for fiscal discipline in Greece and other possible recipients (i.e. Ireland and Portugal).

It looks like the crisis has brought back the idea for a true European political union on the table. The president of the ECB, Jean-Claude Trichet, himself has called for the establishment of a European financial minister.

Now, the idea is not really new. Back in the 1950s there was such a project, called the European Political Community (EPC) that aimed to politically unite the Member States in the European Economic Community (read more about it in the excellent paper by Berthold Rittberger). The main institutional innovation in the EPC was the central role of the bicameral parliamentary body in adopting the budget and the legislation. The EPC project failed, but some of its ideas were later implemented by including the European Parliament in the legislative and budgetary procedures.

Going back to Mr. Trichet’s ideas, we see something completely different. In his framework, the Council would act on the basis of a proposal by the Commission, in liaison with the ECB, to take some measures directly affecting the economy of the Member State that has not implemented its fiscal stability program. There is no role for the European Parliament whatsoever. Apparently Mr. Trichet believes that the very agreement on a stability program is substantial legitimation for a direct involvement in the economic and fiscal policies of a Member State by the Council.

This is quite doubtful. It’s very difficult to imagine how the same people that violently oppose to austerity measures taken by their democratically elected governments will somehow accept direct interference by an institution of the European Union. It’s equally difficult to imagine that the European Parliament will approve such an institutional framework. I can certainly understand the reasonable motives for proposing such a second stage of austerity enforcement, but I’m afraid that such a procedure will decisively worsen the democratic deficit of the European Union.

If and when the governments of the Member States decide that a more profound Treaty revision is needed for establishing tighter fiscal coordination, they will have to consult their national parliaments and the European Parliament. Such consultations are in fact inevitable, since TEU requires the summoning of a Convention to adopt the draft text of the revision (art. 48, para. 2-5 TEU).

 

 

To Amend or Not to Amend? That is the Question

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.

Achievements and Omissions in the European Council Conclusions on the EU Economy

I’ll make an attempt to list the achievements and the omissions in the European Council conclusions from the meeting on the 17 June 2010 on the EU economy.

Achievements:

The Europe 2020 Strategy – it is supposed to promote a series of reforms aimed at competitiveness and employment, placing research and development at the centre of economic initiatives for the next decade. The aim is to raise to 75% the employment rate for women and men aged 20-64, raising combined public and private investment levels in research and development to 3% of GDP, reducing greenhouse gas emissions by 20%, reducing school drop-out rates to less than 10%, and aiming to lift at least 20 million people out of the risk of poverty and exclusion.

Economic governance – explicit objective for strengthening both the preventive and corrective arms of the Stability and Growth Pact; introducing the concept of dynamic debt; a scoreboard to better assess competitiveness developments and imbalances and allowing for an early detection of unsustainable or dangerous trends; publication of results of ongoing stress tests by banking supervisor; introduction of systems of levies and taxes on financial institutions to ensure fair burden-sharing and to set incentives to contain systemic risk.

Iceland – start of accession negotiations.

Estonia – adoption of the euro on 1 January 2011.

Iran – new sanctions based on UN Security Council Resolution 1929.

Omissions – the European Council failed to produce any specific measures on dealing with growth imbalances and actual, serious fiscal policy coordination. In other words the European Council delayed taking painful decisions on the future of economic governance in the European Union, while setting strategic objectives that may or may not produce effective results.