Tag Archives: Public Finances

Dissecting the New Franco-German Proposal for the Eurozone

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.

The Pact for the Euro: a Summary

The heads of state and government of the еurozone Member States have adopted a new competitiveness pact, called “A Pact for the Euro”. The pact comes as a form of guarantee for Germany in order to increase the funds of the European Stability Mechanism (ESM). You can read more about my concerns about the legality of such a pact here. An early assessment of the Pact for the Euro is available here.

The guiding rules of the Pact for the Euro:

  • It will be complementary to the existing instruments of economic governance in the EU;
  • It will concentrate on actions where the competence lies with the Member States. In the chosen policy areas common objectives will be agreed upon at the Heads of State or Government level;
  • Each year, concrete national commitments will be undertaken by each Head of State or Government;
  • The implementation of commitments and progress towards the common policy objectives will be monitored politically by the Heads of State or Government of the Euro area and participating countries on a yearly basis.

The goals of the Pact for the Euro:

  • Fostering competitiveness;
  • Fostering employment;
  • Contributing further to the sustainability of public finances;
  • Reinforcing financial stability.

The main policy instruments:

  • Monitoring and adjusting unit labour costs (ULC);
  • Removing unjustified restrictions on professional services and the retail sector;
  • Improving education systems and promote R&D, innovation and infrastructure;
  • Removing red tape and improving the regulatory framework (e.g. bankruptcy laws, commercial code);
  • Labour market reforms to promote “flexicurity”;
  • Tax reforms, such as lowering taxes on labour;
  • Aligning the pension system to the national demographic situation;
  • Putting in place national legislation for banking resolution;
  • Developing a common corporate tax base.

 

 

New Deficit Plan for Greece

The Greek government has adopted a new plan to reduce the budget deficit in the next few years. The plan aims to cut the deficit to 8.7 percent of GDP this year, 5.6 percent next year and below 3 percent by 2012. The plan envisages deep cuts in hospital and defence spending. Budget revenue is expected to rise due to higher excise taxes on tobacco and alcohol, an overhaul of the tax system and a crackdown on tax evasion. Greece will send the draft to the European Commission on Friday.

Greece will be urged next week in the Council to improve its economic statistics after a report by the European Commission found “deliberate misreporting of figures by the Greek authorities in 2009”.

Long-Term Financial Risks for Member States

The European Commission has issued a report on the sustainability of public finances in Member States. The report groups countries based on their medium- and long-term risk profiles.

To my surprise Bulgaria is in the lowest risk group together with Denmark, Estonia, Finland and Sweden. The countries whose public finances are most at risk in the medium term are Ireland, Greece, Latvia, Spain and the United Kingdom.

The report proposes a policy framework for improving the sustainability of public finances that includes:

  • Deficit and debt reduction;
  • Increasing employment rates;
  • Reform of pension and healthcare systems.

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.