Blog post

European Governance 2.0

Publishing date
06 October 2010

What’s at stake: The European Commission has presented draft legislation that, if adopted by the European Parliament and the European Council, would mark the biggest reform of economic governance in Europe since the start of monetary union. The European Commission released a package of 6 legislative proposals last week. It follows two communications, (the first on May 12 here, and the second released on June 30 here) and responds largely to the pressing demands from the Van Rompuy Task force to push through an ambitious economic governance overhaul by the end of the year. The actions of the parliament will be key since 5 out of the 6 proposals will be legislated under the co-decision process allowed by the Lisbon Treaty. The ball is now in the court of the Council of Finance Ministers who will decide on these proposals at its October and December meetings.

Summary of proposals

Eurointelligence argues that main drift of the Commission’s 11 page document is to shift away from the pure fiscal focus to a much broader policy co-ordination process, and on preventative, rather than corrective action. Specifically it includes an upgrading of the debt sustainability criterion in the Maastricht Treaty, and a more automatic application of the penalty procedures of the stability pact. Furthermore, the Commission proposes early-stage co-ordination in budgetary processes. At the moment, member states only present their budgets as a fait-accompli, after they have been decided. There are no proposals for a common European bond, though this could still happen within the co-ordination mechanisms proposed in the paper. Olli Rehn’s paper also proposes stronger co-ordination of policies to reduce intra-eurozone imbalances, upgrading a current peer review process to a more binding policy co-ordination process under Art. 136 TFEU.

Jean Claude Trichet, in his speech to the ECON committee of the European Parliament, argued that a ‘quantum leap’ in strengthening EU and euro area economic governance would require a Treaty change but short of it, we have to exploit to the maximum secondary legislation.

The FT Brussels blog and Charlemagne describe how this governance overhaul debate is being slowed down and affected by the bicephal nature of the European leadership. The competition between the Commission’s President, Mr. Barroso and the Council and Task Force’s President, Mr. van Rompuy both fighting for leadership on this issue is counterproductive.

Charlemagne lays out the sticking issues regarding the proposals: Italy opposes the new focus on accumulated debt; France dislikes the idea of “semi-automatic” sanctions that would be imposed more or less on the say-so of Eurocrats; and Spain rejects the notion that penalties against countries deemed to be losing competitiveness; and Germany has just recently agreed to postpone to a later discussion its demand that profligate countries should have their EU voting rights suspended.

Giving teeth to the Pact

Charles Wyplosz argues that the proposal to reverse the decision mechanism could give teeth to the SGP and but is über-risky. Under the current version of the SGP, the Commission proposes a sanction to ECOFIN and the proposal is accepted if there is a qualified majority that votes for it. Instead, under what the Commission proposes, the sanction would be accepted unless a qualified majority opposes it. Since it is always difficult to assemble a qualified majority, the default option would be the most likely outcome and would therefore make the punishment threat way more credible. But quasi-automatic sanctions are likely to sow the seeds of a major conflict between member states and the Commission, and within member states as a sanctioned country will feel abandoned by the others. Imposing a fine on a friendly sovereign state, with a democratically elected government, is an unknown experiment. It will take a lot of courage – irresponsibility, some will say – for a Commission to trigger a mechanism which is bound to unleash violent anti-European sentiment. The proposal in effect puts the Commission in an impossible situation. Either it imposes a sanction, and the political reaction could be disastrous, or it shies away, and the pact is undermined, once again.

Paul De Grauwe in a critical Policy Brief released on the same day than the Commission’s legislative package argues that strengthening the SGP by adding more sanctions is ill conceived. With the exception of Greece, the fundamental cause of the debt crisis in the eurozone is to be found in the unsustainable expansion of private debt prior to the crisis. Expansion of government debt levels in the eurozone started after the financial crisis erupted and are therefore only a consequence not a cause of the crisis. The official EU-proposals (from the European Commission and the Task Force on Economic Governance) to deal with national divergences in the eurozone should therefore not concentrate almost exclusively on what governments of the member-states should do, but also on the responsibilities of the eurozone monetary authorities to reduce the credit fuelled « animal spirits» divergences which – more than fiscal policies and structural rigidities – are at the heart of the European problem.

Laurence Boone argues that rather than on sanctions the emphasis should be more on creating incentives for budget discipline. Jakob Von Weizsäcker and Jacques Delpla have proposed a mechanism for pooling sovereign bonds that remain under the 60% debt threshold but let country cope alone with the markets to raise funds beyond this limit. Other incentive mechanisms could be envisaged, for example by making a variable portion of disbursements under European cohesion funds and regional.

Guido Tabellini argues that rather than trying to invade national governments’ autonomy in economic policy, the European authorities should focus on the transfer of sovereignty in the field of financial supervision. All macroeconomic imbalances are accompanied by excessive debt accumulation. But for every debtor there is always a creditor, and in Europe it is typically a bank. Many of the bad investments in Southern Europe have been financed by national banks, which in turn are financed by other banks from Germany or other Eurozone countries. More cautious supervisory policies, especially at the European level, may have identified and pre-empted the accumulation of these unsustainable situations.

Macroeconomic surveillance

Stephen Fidler notes that macroeconomic surveillance is a horse of a different color. It signals a bold new role for the European Commission as a sort of economic-policy arbiter on a continental scale. But this business is harder than prescribing drugs to spendaholic governments since there is much less agreement on how to deal with such imbalances.

Sebastian Dullien and Daniela Schwarzer note that the proposal to correct macroeconomics imbalances passes, it will be the first time that the imperative of macroeconomic coordination set down in Art. 121 will actually be enforced. The (yet to be defined) “scoreboard” of indicators is supposed to monitor macroeconomic imbalances and rather interestingly the Commission seems to adopt a symmetric approach when looking at imbalances which should spark lively debates in Germany and other surplus countries. But as noted by Charles Wyplosz, ten years of experience with the ill-fated Lisbon process, which relied on scoreboards and peer pressure, have demonstrated beyond doubt that such a mechanism is bound to fail.

Market discipline and the EFSF

Niels Thygesen argues that the future role of financial markets in disciplining budgetary policies under a reformed regime depends to a major extent on the ability of the van Rompuy Task Force to define a crisis-management mechanism to replace the EFSF. Neither this new mechanism, nor potential ECB purchases of bonds issued by the weakest euro area sovereigns, should be allowed to undermine the critical role that financial markets can play in supplementing the closer mutual monitoring of policies. A future crisis-management mechanism – if, indeed, governments can agree on one at all – should retain some ambiguity as to how the insurance provided to member states will operate, focusing instead on procedures, in particular regarding creditors’ participation in sharing losses, and on the principle of IMF involvement in shaping loan conditionality. Leaving scope in this way for financial markets to impose discipline offers the best hope for maintaining individual countries’ primary responsibility for their non-monetary policies, which was central to the original vision for the euro.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.

About the authors

  • Jérémie Cohen-Setton

    Jérémie Cohen-Setton is a Research Fellow at the Peterson Institute for International Economics. Jérémie received his PhD in Economics from U.C. Berkeley and worked previously with Goldman Sachs Global Economic Research, HM Treasury, and Bruegel. At Bruegel, he was Research Assistant to Director Jean Pisani-Ferry and President Mario Monti. He also shaped and developed the Bruegel Economic Blogs Review.

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