Interview: Guy Verhofstadt, Prime Minister of Belgium 

Prime Minister thanks once again for this interview. We have a few questions on your memorandum. In the letter that you wrote to your colleagues a few weeks ago, you demand that European measures deliver on the European agenda. Why did you feel that this was necessary, were you not happy with the Commissions proposals? 

I found the Commission proposals good because they reinforce methods, such as the open coordination method in the past, and now with the national action plan there is more pressure to realise the Lisbon goals, but I think that beyond the national action plans you also need a European strategy. This gives the impression that no European economy exists, with European weaknesses and with the need for European strategy, the idea now is that the aims of Lisbon are positive goals and through the national action plans we will find a solution for reaching these goals. I think that these national action plans are good as they give governments the incentive to do something, but beyond that there is also the need for a more global strategy. And the second reason why I am saying that is because, ultimately, my fear is that relying exclusively on national action plans can create social and fiscal dumping because you have competition between action plans. On the downside, this competition can result in the dumping of social security and fiscal issues among others. I am not against the Commission proposals, my suggestion is to look beyond the national action plans and develop in parallel an EU strategy for the European economy. 

But originally, the Lisbon agenda was a European strategy. 

No, it wasn’t a strategy, it was a goal. The name we give to it is a strategy, but it wasn’t a strategy it was a goal. For a strategy you need two things – a goal, but also a method through which to reach it. We have only one thing, the goal, not the method. If you compare the Lisbon strategy with the Euro initiative or the internal market, you will see that in the internal market and in the Euro initiative – two of the big EU projects – there was an engine to go forward. There was the stability pact that was an engine for the eurozone, particularly noticeable in Belgium, and for the internal market there was the mutual recognition principle that was the driving force. Now what is the driving force here? Simply best practices and the open coordination method is not enough. 

I wanted to come to that point. You are questioning this. Is it because peer pressure, which is normally supposed to deliver if you have an open coordination method, isn't working?

Only once a year. That is not enough. Just when the report comes out and when you have a parliamentary debate. The following day it is already forgotten. There is also a political struggle to get a good quote in this report. The proposal about the BEPG [Broad Economic Policy Guidelines] for example, in which you see that three countries have reached the goals, then when the final version is released, six countries have reached the goals. This is a result of the pressure placed on national governments. So the pressure coming from the open coordination method is not bad, but it is not strong enough. It is only once a year when the report is published that there is pressure. And the Kok report confirms this. So we want national action plans. But if you don’t have an EU strategy there is the risk of suffering from social and fiscal dumping. The Lisbon strategy was to have a competitive economy but with the guarantee that we can continue our social model. Relying only on a national action plan means that we run the risk of having problems with the social model. 

In order to strengthen this open method of coordination and up the pressure, the Kok report proposed 'naming and shaming'. The Commission has left this out. Do you regret that? 

'Naming and shaming' was in fact the only thing that was left from the open coordination method. That was naming and shaming - by making comparisons between different countries. I don’t like this method, and feel that an alternative solution must be created. In the EU strategy that I foresee, you have a bigger role for the Commission and the chance for the Commission to test every national measure. Rather than 'naming and shaming' or making distinctions between the 'good guys' and the 'bad guys', every national measure taken is Lisbon approved and a decision is made as to whether or not a national measure complies with the criteria of the Lisbon agenda and helps to achieve the goals set out by this strategy. That is one of five elements of the EU strategy with the Commission as the driving force and having the possibility to do something. 

In the end, if you analyse who passes the test on specific dossiers, ultimately it will amount to a 'name and shame' as if such figures are made public, people will sit down to count and see that certain countries score badly. 

The Commission does not give a percentage out of 100 or awards a distinction, it is simply saying what you have done today is very good. Go for it again tomorrow. That’s what testing is. I think it is better that the Commission is in charge of this process. With national action plans, the role of the Commission in the process is questionable. 

Why aren’t you going for a Benelux memorandum? 

We shall try to do so. I have a meeting with Jean Claude Juncker tomorrow. I had a long conversation with him on the subject and we will have a normal Benelux meeting. It is not an easy battle, as I am proposing a huge change in the methods of the Lisbon strategy, such as the convergence code for example, change in taxation, and use of the financial perspectives to reach R & D, Lisbon testing and all EU instruments. They are new and there is certainly some fear from certain countries about going in that direction. I am very realistic about it. 

Is this something you are going to lobby for? Are you going to talk to Mr Juncker tomorrow? 

I have already started. I am in discussions with my colleagues about it. Gerhard Schröder, Commission President Barroso and Mr. Juncker. I have sent it to my colleagues, I give speeches everywhere and I see the leading economists in the EU about these issues, so I’m trying to have an open debate about this in the Council. I’m convinced of the fact that if we do not adopt either this or a similar EU strategy, we won’t have the engine that we need for success in five, ten or even fifteen years. 

But are you aiming for a shift in direction of the Council for the Spring Council or is this a discussion that you expect will take more time? 

Well, I hope that we can already have the first results of this in the Spring Council, but at the moment it is difficult to predict whether we can reach this target. At the current time, I do not have enough information about the positions of everyone. The fact is, with the Bush visit, the open discussion on the Lisbon strategy has not started yet. But it will begin very soon, as the date approaches. 

Let’s get to the real substance of your proposal. First of all, you are proposing this code of convergence, which is essentially a range. I suppose it took its inspiration from the stability pact. But on what economic essentials would these minimum and maximum values be applied? 

That has to be discussed, but I gave a number of examples, in saying what is the flexibility of the labour market, what is the career for normal people working in the private sector, what is the fiscal pressure on companies and private enterprises. You could make a code of ten elements or you could make a code that is larger than that. But what I have done is refrain from specifying the particular elements needed and instead, simply given the philosophy behind it – that you create corridors, the minima you need to avoid falling into social dumping and the maxima needed to prevent the destruction of your economy’s competitiveness. The advantage of this is that there is enormous room for manoeuvre for the national member states to develop their policies. And, like I said in the paper, it seems that such a convergence code is necessary inside the eurozone. I can understand why some people say ‘I’m no euro so why is it necessary to be in the corridors’, but if you are in the zone and want an economic policy that runs in parallel with your monetary policy you need that, and the advantage is not harmonisation but uniformisation. Naturally, the discussion will be on what is the space between the minimum and maximum, what is the range? How many of these elements are you taking in your conversion code? But essentially the idea is that you are doing this to have an economic policy with room for manoeuvre for the national member states. If people say this is a good idea, then we can ask the Commission to try to make a list of the indicators, and decide upon the possible range for every indicator. 

But is there not the same problem as with the stability pact of imposing penalties when the range is not respected? 

Yes, but with the difference that the stability pact was more rigorous. You could turn the argument the other way round by saying that maybe the stability pact is becoming increasingly like a convergence code. This means that the convergence idea might not be such a bad idea. With the stability pact like it is now, without the possible changes that can occur, you look at the 3% target and bang… the sanctions procedure is implemented. With the convergence code you have more room for manoeuvre so that if penalties are imposed, they are more justified. I think you could also have two sorts of players in a convergence code. There are those inside the eurozone where code is tougher while those outside the eurozone are not within the same policy framework. 

The main idea of your paper is the tax shifts from direct to indirect taxation. 

I find the convergence code more important. In fact, you can put the shift of taxation in the convergence code. It could be one element of your convergence code. But it is important because the convergence code helps to develop a European economic policy and can offer a solution to some tensions inside the EU following the enlargement. The shift in taxation is a possible answer to the enormous balance of payments deficit that we have today with Asia and China. 

What will be the main advantages according to you in this shift from direct to indirect taxation? 

The advantages will be that the financing of your chosen European social model will be more balanced. At the moment it is mostly paid by taxation on production, and then by taxation on consumption. This means that all the products and services that are imported into the EU contribute towards financing the global social model in Europe. In my opinion, you have to do that in Europe as a whole, not a single country; otherwise you would disturb the internal market. You can also see that those countries doing it on their own do not have bad results – the UK and Denmark for example. Thirdly, what is interesting to see is that those countries that need it the most have the lowest percentage. Old industrial countries like Belgium and Germany have the highest percentage of taxation on their production. I consider that a form of masochism. 

On the other hand, indirect taxation has sometimes been accused of being socially regressive in the sense that with taxes on consumption, the poor pay as much as the affluent. 

There are more and more studies on this subject, including in Belgium, which demonstrate that the redistributive effect of indirect taxation is as great as direct taxation, because the attitude of someone who has money is different from someone who does not. Someone who has money is more likely to buy an expensive car or a second car and pays more indirect taxes. By the way, I’m not suggesting that we abolish direct taxation, simply that we must rebalance it, and at the midterm review, you can reach a target of 50%. 

Of course, it might be a good idea, but is it feasible to expect 100% support from member states. As you know, taxation is still a unanimity issue. 

I didn’t talk about the basis of taxation or taxation rates. It is only the idea. Do we make this shift? Yes or no? It is something that you could put in a convergence code without interfering in the competence of national states to decide on the rates and the tax basis? 

If we look at the Lisbon scoreboards, it is often the Swedish, Finish and Danish nations who do best on a lot of accounts. One of the things in terms of employment is the 'flexicurity' model which makes it easier to hire people. 

What we have done here is make a change in the unemployment regulations and it is a shift in the direction of countries like Sweden where you use this regulation on unemployment to find jobs for people, instead of a system of benefit. Secondly, it is true that in R&D Belgium are ranked in around fifth place, way above the European average. So, one of the reasons that I am putting this on the table is that a convergence code and the maximum convergence code will put enough pressure on reform in national member states. There is certainly pressure by the national action plans, but that is not enough. I was always in favour of the enormous pressure of the stability pact on a number of countries. The effect on my country is the best example of it. We had the highest public debts of the EU. Today it is lower than 100% and it is going down. The same thing applies to the fiscal deficit. Five years in a row a balanced budget, and even a small surplus. Why do we have this? Because there was pressure from the stability pact to reform. And with a convergence code I think we could create similar pressure to have the reforms like in Finland in R&D or, for example, on unemployment regulation in Sweden. Or on other issues such as indirect and direct taxation like in Denmark. Those are three good examples. If you don’t have that, my point is there is the European economy. It may not be perfect and it is not a unique one, being fairly diverse. Then again, so is the US economy. There are also common weaknesses, such as the cost of labour and the taxation on production to finance the social model. Naturally there is diversity. One country is more concentrated on industry, another on goods and services while another focuses on new technologies and so on. But why don’t we recognise that this is something that we have to do together. If we see the figures of economic growth, there are differences inside the EU, but you can see that European economies grow more slowly than North American economies or economies in Asia. So there is a common problem and common approach that is necessary. I know that it is not easy to say that in the Council, where everyone is responsible for their own country. Yet, on the other hand, it gives you an argument to do something, such as implement reforms that you would otherwise be reluctant to propose due to the domestic difficulties involved. We have experience from the stability pact and public finances. 

You have been a good pupil, but on the other hand there have been some bad pupils that have not been punished for being bad pupils.

My point is that we have not used the stability pact in the best way. When the problems with France or Germany occurred, perhaps there were other ways to deal with them. Maybe it could have been better if the Commission had taken a stability pact, gone to Berlin, stayed there 3 months, discussed it everyday and come out with a broad agreement. 

If we jump to the Barroso Commission. The way it looked from our perspective was that he started out with a very liberal profile. A liberal overall image of the Commission. That made some noise. Since then, others have stepped forward saying that the Lisbon agenda is not only about the liberal economy but also about the other pillars, social and environment. We met with a confused message. What’s your impression of this? 

I think it is too early to condemn the Commission. What we try to do is help the Commission in putting ideas forward that go beyond the proposals of the Commission and that is exactly what I said to the President of the Commission, Barroso. That is the reason why I say that the Commission proposals are ok, but we have to go beyond them. And that is what we are trying to do. I think the best thing we can do is not to criticise the Commission but to support it at this early stage of its administration. 

Are you not concerned that the service directive is being withdrawn? 

I think that the approach of the Commission is realistic. They have seen that there are five or six countries with huge problems. One of those being Belgium. There are a number of traditions here, like in France and in Germany. We are all different from the profiles in the original Bolkestein directive. And so they have now promised to commit to new proposals. Let’s wait and see what they produce in terms of new proposals. We need this service directive, that is fairly clear. It is one of the weaknesses in the internal market. But I think now we have to wait and see what their specific proposals are and whether they will take into consideration remarks from some of the countries. 

Do you think there is a fear, maybe in France - particularly where we have seen the Socialist Party divided on the issue and strong unions - that they will try to avenge themselves and vote 'no' to the constitution? 

I think what was important was that the Commission decided what the problems were with the service directive and suggested new proposals that allow the discussion on the EU Constitution to remain about the EU Constitution and not other business. That is always the danger with the subject. 

The referenda will of course be very crucial for the future of the EU and the Commission does not seem to have a contingency plan if one of the bigger nations such as the UK or Poland says 'no'. Supposing that happens, what would be your solution? 

Then you take what is written in the EU Constitution. If at least 20 nations ratify the EU Constitution and there is a problem with the others, a special meeting of the European Council must be held and an appropriate solution will have to be found. I am always referring to what happened in 1787 in Philadelphia with the convention with James Madison and George Washington. It was the same problem. They created a more unified union with majority rule – the rule of nine. Interesting material has been published comparing the EU Constitution and the Philadelphia convention. What has to be done, the basis is inside the Constitution. It is recognised within the Constitution that it could be possible. Hopefully the EU-25 will ratify the Constitution and we can go forward. If this is not the case, then we have foreseen the eventuality and a special meeting of the European Council will be held. 

It is obvious that a crisis summit will be held should the Constitution not be ratified by all member states. But how would you propose to your colleagues that you should deal with the situation?

It is too early to say. We should all hope for the ratification by the 25. I do not think that it is productive today to start a discussion about what could happen afterwards, as this will create arguments for eurosceptics who do not want to see the Constitution go through. I am a European in favour of a more integrated union so I do not want to give arguments to those against further integration. 

But if there was a 'no' from either the UK or Poland, would that not give the more federalist countries an opportunity to strengthen their cooperation and go for a multi-speed Europe. Is that what some of you are actually hoping for? 

I hope that there is a yes vote from all 25 member states. But of course there are possibilities for greater cooperation. That is no secret. It is also an article in the EU Constitution. We now have to try and make it easier to use such enhanced cooperation in the future. In the past this has featured in the Nice Treaty. But that cannot be the agenda at this moment in the EU. Our agenda has to be the ratification by all 25 member states. 

We are approaching one year after enlargement with the ten new member countries. It seems that the budget battles will be very hard on cohesion funds and structural funds. It looks like they got a bad deal, many would say, and the original EU-15 will be holding on tightly to their financial assets. Bearing in mind the transition periods and the failure of the services directive, which looked like an opening for them to be entrepreneurial, do you not think that the early enthusiasm with which they joined will disappear very quickly? 

We have to make sure that what we have promised in our enlargement talks will materialise. This must be translated into the new financial prospectives for 2007-2013. I think it is possible to find a solution. We have to reach a compromise and find a figure that will satisfy both proposals. One of the reasons that I wrote this paper was to emphasis the fact that, despite having a lower figure, it is nevertheless possible to do something on cohesion along the lines of Lisbon. 

But you are not part of the gang of six who stick to the 1% figure?

No. But nor am I part of the gang saying it has to be 1.25% because I think that we need to analyse the proposals and determine what Europe needs exactly. Putting forward proposals such as the ones on R&D expenditures can help in this respect. So we are looking for a compromise to help the Presidency.

Read the shorter version of this interview.