Blog Post

Insufficient home-assignments from the European Semester

Does the European Semester deliver the right policy advice to the euro area? Unfortunately, we find the recommendations disappointing, for a number of reasons.

By: Date: September 30, 2013 Topic: Macroeconomic policy

Policy contribution – ‘Does the European Semester deliver the right policy advice?

The backbone of the EU’s economic policy coordination is the European Semester. In each year, it starts with the setting of the main priorities by the European Commission, followed by the submission and assessment of EU member states’ economic, fiscal and structural plans, and concludes with country-specific recommendations and recommendations for the euro area as a whole.

Does the European Semester deliver the right policy advice to the euro area? This was the question we tried to answer with Erkki Vihriälä in a briefing paper we wrote for the European Parliament. Unfortunately, we found the recommendations disappointing, for a number of reasons.

First, the recommendations to the euro area as whole are not really reflected by the country-specific recommendations. An example is that while the euro area recommendations call for addressing national distortions to saving and investment in both current account deficit and surplus countries, but Germany and the Netherlands (two major surplus countries) have not received specific recommendations to this end. Their large current account surpluses are not even mentioned in the recommendations. In terms of wage growth, Germany was advised to “Sustain conditions that enable wage growth to support domestic demand.”, which sounds promising, but the details on how to do this waters down the headline proposal: beyond reducing high taxes and social security contributions for low-wage earners, the second key channel is raising the educational achievement of disadvantaged people, which of course has to be a major goal, but it is unlikely to contribute in a significant way to wage growth. Also, three additional sentences call for increasing employment, which is again important, but in a country which is close to full employment (rather high labour force participation rate and low unemployment rate), it won’t deliver much.

And symmetric intra-euro area adjustments would be necessary not just for rebalancing price-competitiveness between euro-area deficit and surplus countries, but also for public debt sustainability. Competitiveness adjustment in deficit countries requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When inflation in surplus countries is low (eg below two percent), inflation has to be even lower in southern Europe, undermining debt sustainability, as I argued in another paper we published earlier this month. Interestingly, Daniel Gros and Cinzia Alcidi from CEPS also wrote a paper on the very same topic recently.

Second, demand is not important according to the recommendations, despite the still weak cyclical position of the euro-area economy. Investment is not a priority, even in countries with healthy public and private balance sheets and very low investment rates, like Germany.

Third, the concept of the “aggregate fiscal stance of the euro area” is a largely empty concept – even though it is emphasised in the euro area recommendations. The ideal aggregate fiscal stance of the euro area is not specified, and consequently not allocated between countries. Instead, the fiscal strategy continues to reflect a consolidation bias, which is not consistent with the economic situation of the euro area. The issue is not a return to ‘failed old debt-making policies’ in highly indebted countries (in these countries fiscal consolidation was necessary and has to continue at an appropriate pace), but to ensure fiscal stabilisation at the euro-area level as long as private demand is weak.

Fourth, the suggestions for financial sector repair go in the right direction, but remain too timid. Although the euro-area recommendations include a call to limit national supervisory incentives for re-nationalisation of bank assets and liabilities, this is absent from the country-specific recommendations. Another issue that is not properly addressed is the general undercapitalisation of the European banking system, which extends to the core countries.

The most comprehensive recommendations are on structural reforms aimed at improving the functioning of labour and product markets and making the business environment more growth-friendly, and on improving public finance management.

Therefore, and not very surprisingly, the recommendations very much reflect the general view on economic policies of the European Commission and Germany, placing strong emphasis on structural reforms and almost no emphasis on demand. Even the straitjacket of the European economic governance framework is not exploited sufficiently. I 100% agree that structural reforms are essential, but they can help at best in the medium- to long-term, while lack of growth in the short-term will have harmful impact on long-term growth too, as I argued here. Have the EU’s economic policies been successful so far, as claimed by several policymakers recently? Well, many people think they have not, as it was nicely summarised by this week’s Bruegel Blog review.

Policy contribution – ‘Does the European Semester deliver the right policy advice?


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Filippo di Mauro, Wolfhard Kaus, Steffen Müller, Gianluca Santoni, Verena Plümpe, Andrea Roventini, Valerie Smeets, Nicola Viegi, Markus Zimmermann and Javier Miranda Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts