Blog Post

(Com-)Mission to Rome or what a euro area finance ministry means

The house is on fire. Interest spreads of Italian bonds relative to German Bunds have increased significantly since the summer. Rating agencies have downgraded Italy and market participants increasingly voice their skepticism as regards the ability of Italy to repay its large government debt. The emerging consensus now is that a strong commitment by Italy […]

By: Date: November 16, 2011 Topic: Macroeconomic policy

The house is on fire. Interest spreads of Italian bonds relative to German Bunds have increased significantly since the summer. Rating agencies have downgraded Italy and market participants increasingly voice their skepticism as regards the ability of Italy to repay its large government debt. The emerging consensus now is that a strong commitment by Italy to reforms will be an important element of the solution. ECB assistance continues to be needed in the absence of any further fiscal integration steps. However, there is a need for a clear framework to define the terms and conditions of assistance and reforms. While IMF involvement is welcome, the euro area should itself use available instruments to frame and guide the process. Using existing instruments would also allow us to pave the way towards deeper integration and a eurozone finance ministry that has been mentioned by the former ECB president.

The European Commission should play a major and formal role in supporting the Italian government in their commitment to act. In fact, the EU has strong tools to that effect: Since the adoption of the so-called six-pack, there exists a very clear and relevant legal and institutional framework. For once, the Commission should move ahead with the next steps of the newly reformed stability and growth pact. This new pact foresees a clear and quick reduction in the debt to GDP ratio. As Italy’s debt is far from the agreed goal of 60 percent of GDP, the new regulation foresees a very significant and quick fiscal consolidation.

Equally important, a new excessive macroeconomic imbalances procedure (short EIP) has become an EU law of great relevance to Italy. The procedure would allow the European Commission to move ahead with very strong policy recommendations as regards structural policies. These recommendations would become binding on the Italian government after a vote of the Council.The case to do so in Italy is strong. The starting point of the procedure is a so-called “scoreboard”, which aims to detect significant macroeconomic imbalances. In the case of Italy, in particular the loss of global export market share is one of the most worrying signals on the scoreboard. In fact, Italy’s global market share has fallen by more than 30% since the introduction of the euro. In addition, the current account balance has slowly but persistently deteriorated. Finally, growth figures are proving the absence of dynamism in today’s Italian economy. So the formal requirements for opening a procedure are present. Also the next steps of the formal procedure have already been undertaken informally. In fact, the European Commission has already conducted the “in-depth study”, which identifies the major reform needs in Italy. The recommendations on the national reform plans published on June 7 cover a great part of the currently proposed reforms. Also the last step of the procedure has already been undertaken informally: The letter of intent by the Italian government details the measures that the government wishes to implement to address the imbalance in the economy.

The EIP was always considered to be a form of a pre-programme surveillance with frequent missions by the European Commission in liaison with the ECB. As Italy is already receiving ECB assistance, the case for pre-programme missions by the European institutions is obvious. Of course, the ECB has already been asking for reforms in exchange for its bond purchases. A formalization of this conditionality with frequent missions to Italy in the framework of the EIP and EDP procedures are now a logical consequence that would increase the legitimacy of recommendations. As the timetable proposed by the Italian government for the implementation of its reforms is very tight, the European Commission should open the procedure at the next ECOFIN meeting so as to come to legally binding policy recommendations as soon as possible.

More fundamentally, moving ahead with formal missions to Rome would also be the natural next step towards a euro-area finance ministry. The more the euro area moves towards fiscal and financial solidarity, the more economic policies of one member state will have to be influenced by “Brussels”. Further down the road, this euro-area finance ministry will need to acquire far greater competencies than those currently exercised in missions and surveillance procedures. Only a further devolution of sovereignty will be sufficient to reduce negative incentives created by a common fiscal policy and Eurobonds. Of course the euro-area finance ministry will need to have the backing of the European Parliament for all of these actions. All of this will require far-reaching treaty changes. The next step towards a euro area treasury will be to get serious with surveillance and much needed reforms within the existing and formal surveillance instruments. The European Commission should not miss this opportunity.


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