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25/07/2016

Brussels tables plans for closer EU economic union

EU Priorities 2020

Brussels tables plans for closer EU economic union

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After a weekend that saw the euro zone take unprecedented steps to rescue debt-laden members with a €500 billion aid package, the European Commission is proposing a new set of rules to tighten the bloc's fiscal and economic policies and prevent crises in the future.

Under the proposal, presented on Wednesday (12 May), EU countries will review each others' draft annual budgets before they are adopted at national level.

This system – if approved by EU leaders at a meeting in June – would apply as of 2011 and would introduce closer economic surveillance in the bloc, with an early peer-review system aimed at preventing a repeat of the Greek sovereign debt crisis.

"Let's be clear: You can't have a monetary union without having an economic union," stressed European Commission President José Manuel Barroso.

"Member states should have the courage to say whether they want an economic union or not. And if they don't, it's better to forget monetary union all together."

Surveillance

The surveillance would be carried out in the first half of the year during a "European semester," before EU governments prepare their national budgets and economic reform programmes.

"In case of obvious inadequacies in the budget plans for the following year, a revision of [national budget] plans could be recommended," the Commission says.

"Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension [and] that they don't put at risk the stability of other member states," said Economic and Monetary Affairs Commissioner Olli Rehn.

The system would be applied to all countries, but surveillance would be tighter for those which have adopted the euro.

For eurozone countries, such a review mechanism should act as an early-warning system for states found to breach the Stability and Growth Pact, which sets a limit on public debt (60% of GDP) and budget deficits (3% of GDP).

EU officials claim the system will not violate a country's national sovereignty but will provide an opportunity to check the assumptions on which draft budgets are based, such as economic growth, inflation and interest rates.

Barroso said the system will provide an opportunity for national parliaments to better scrutinise their country's budget. "What we are doing is giving parliaments more information and therefore more power," he said.

Greece, which is at the root of the current crisis, was found to be grossly lying about its macro-economic statistics for years, pretending its budget deficits were lower than they really were and submitting false reports to EU statistical office Eurostat.

"A prerequisite would be to strengthen Eurostat's mandate to audit national statistics," the Commission says. "It is important to bring this proposal swiftly into force as this will improve the quality of reporting on public finances."

Addressing macro-economic imbalances

The Commission also plans to "deepen and broaden" budgetary surveillance to macro-economic policies, warning that "macro-economic imbalances can have serious consequences over time".

However, such a proposal is likely to be resisted in Germany, where Chancellor Angela Merkel has said it would make fiscal surveillance "unnecessarily political" (EurActiv 02/03/10).

Under the Commission's plans, assessments of longer-term national economic reform programmes would be synchronised with budget discipline reviews. A scoreboard would review macro-economic indicators such as productivity, unit labour costs, employment, public debt and private sector credit in order to detect asset price booms and excessive credit growth at an early stage.

For all EU member states, these macroeconomic imbalances would be addressed under the draft 'Europe 2020' strategy for growth and jobs. For countries which have adopted the euro, the peer review currently carried out by the Eurogroup would be upgraded into more structured surveillance by making use of Article 136 of the EU treaty.

Sanctions and incentives

To give teeth to the surveillance system, the European Commission is proposing to include the possibility of "imposing interest-bearing deposits" in case member states make insufficient progress in consolidating their public finances in good economic times.

As for incentives, countries which accumulate large surpluses during periods of economic prosperity would be allowed to spend more during downturns without being subjected to an excessive deficit procedure.

Payments under the EU's €70 billion cohesion fund, which helps member states reduce economic and social disparities for the period 2007-2013, can also be suspended. The sanction can already be applied to eurozone countries which recurrently breach the Stability and Growth Pact. "We are not planning to use it for the moment," said an EU official.

Positions

Speaking on 12 May, European Commission President José Manuel Barroso said the recent turmoil on European markets had highlighted the need for closer European cooperation. "It's now clear that we are more interdependent than ever before. Financial difficulties in one euro area member state have spill-over effects in the others."

"Let's be clear: You can't have a monetary union without having an economic union. Member states should have the courage to say whether they want an economic union or not. And if they don't, it's better to forget monetary union all together," Barroso said.

Paris and Berlin welcomed the Commission's proposals, with German Chancellor Angela Merkel saying they went in the right direction and that it was not a bad thing that the Commission wanted to have an early look at national budget plans. But she said changes to the EU treaty were still needed to enforce the bloc's budget discipline rules more strictly. 

French government spokesman Luc Chatel said Paris backed the better fiscal and budgetary co-ordination, but added: "It's parliament that votes on the nation's budgets, it's not the European Commission that votes on the budget of the French nation."

German Vice Chancellor Guido Westerwelle said budget policy was at the core of national parliaments' rights.

In a joint letter on 6 May, French President Nicolas Sarkozy and German Chancellor Angela Merkel recommended stricter monitoring of eurozone member states' debt and extending surveillance "to structural issues and competitiveness," and not only excessive deficits as is the case today (EurActiv 07/05/10). They also suggest "strengthening the effectiveness of EU recommendations on economic policy".

Germany is also strongly campaigning to cut regional aid for states which regularly breach the rules of the Stability and Growth Pact. But France is reluctant to take such a tough line on the issue, as it has not always been an irreproachable member of the bloc itself.

Moreover, Merkel has expressed support for more radical reforms, like creating a European Monetary Fund or applying sanctions on eurozone member countries that repeatedly break the bloc's economic guidelines, suggesting for example that their voting rights in the EU Council of Ministers could be suspended (EurActiv 18/03/10).

However, that would require changing the EU treaties, and France prefers more straightforward reforms, like amending the Stability and Growth Pact.

In the European Parliament, French MEP Alain Lamassoure (European People's Party), chairman of the assembly's budget committee, warned that "the coordination of economic policy in Europe cannot be entrusted only to ministers debating and deciding behind closed doors in Brussels".

"How could elected representatives in a member state agree to have their hands tied by decisions taken previously in Brussels and in secret?" Lamassoure asks.

To make the procedure more transparent and democratic, Lamassoure recommends involving national parliaments "as of day one" by inviting elected representatives to debate national budgetary orientations on the same day across the EU and in Brussels. Such a procedure would force parliamentarians to work on the same economic assumptions regarding growth, inflation, interest rates and the price of oil, the MEP said.

It would also force everyone to face up to their responsibilities by setting national priorities against EU budget discipline rules, "in broad daylight and in the fact of national public opinion via the national media," he said. 

Reacting to the Commission's proposal, the Party of European Socialists (PES) warned about a "shift towards austerity" that would compromise economic recovery. The European Commission "runs the risk of infecting the EU recovery with the virus of punishment," said PES President Poul Nyrup Rasmussen, adding that there is "an over-emphasis on fiscal consolidation in the national member-state programmes".

"Punishment and sanctions just bring division and mutual recrimination," Rasmussen warned.

The PES also criticises the Commission proposal for failing to mention the need for new sources of taxation to fuel the EU budget, reiterating its plea for a global financial transactions tax to fight speculation (EurActiv 14/04/10). The PES also backs finding other new funding sources for the EU budget, such as the issuing of common Eurobonds or taxing carbon dioxide emissions.

The Liberal and Democrats group in the European Parliament (ALDE) said the Commission's proposal "will be key to avoiding or containing a further crisis" but questioned member states' determination to offer a collective response to the crisis.

"The big question is whether member states will have learnt their lessons," said ALDE group leader Guy Verhofstadt, warning against national tendencies to act in isolation.

ALDE suggested three steps to achieve greater financial stability and coherence in the euro zone and the EU as a whole. "First is the need for a permanent mechanism to entrench financial stability, along the lines of a European Monetary Fund that provides the solidarity but also the discipline where the old Stability and Growth pact was lacking."

"Second is the clear need to provide the Union with a genuine economic pillar that complements the monetary one, as 27 national fiscal policies are not conducive to a stable currency or a sustainable economy."

"Third, the European Single Market needs to be relaunched and completed along the lines recommended by Mario Monti, taking account of the present context of closer economic interdependence, the challenges of globalisation and the rapidly evolving digital agenda."

Background

EU finance ministers agreed on Sunday (9 May) to establish a rescue mechanism worth around €750 billion to protect the euro from collapsing under the weight of debt accumulated in countries such as Greece, Spain or Portugal (EurActiv 10/05/10).

The mechanism is to be complemented by proposals to reform the economic governance of the EU and the euro zone, in order to prevent similar crises in the future.

The European Commission presented the proposal on 12 May.

Timeline

  • 18 May: EU finance ministers to examine Commission plans for greater economic policy coordination.
  • 17-18 June: EU leaders to debate Commission proposal during a summit in Brussels.
  • 2011: Proposed start of first 'European semester'.

Further Reading