Commission’s top advisor championed market ‘discipline’ in crisis years

Niels Thygesen was an independent member of the Delors Committee on Economic and Monetary Union in 1988 and 1989. [EABH/Flickr]

Niels Thygesen, the new chair of the European Fiscal Board, called for “ambiguity” in the eurozone’s rescue mechanisms in order to let investors “impose discipline” on national governments.

The Danish economist said that leaving scope for the external pressure of financial markets “offers the best hope” to maintain the fiscal discipline among euro members, he wrote in an op-ed published in September 2010.

The professor emeritus of international economics at the University of Copenhagen recalled that, once a country joined the eurozone, financial markets’ discipline “was smaller than foreseen”.

But after the financial system exploded in 2007-2008, “excessive market tolerance was rapidly replaced by very pessimistic assessments of debtor prospects”.

Timeline of a crisis: Europe’s economic strategy from 2008 to today

At the outset of the economic crisis in 2008, the EU mirrored the rescue packages seen in the US and elsewhere. In total, more than €1.6 trillion was used to save the banks and €200 billion to keep the European economies afloat.

Since the Greek government requested financial aid to international lenders in April 2010, investors lost confidence in some of the weakest eurozone economies. Ireland, Portugal, Spain, and Cyprus were also forced to ask for a rescue program.

For many European ministers, investors reacted irrationally during the eurozone crisis.

“We now see herd behaviors in the markets that are really pack behaviors, wolf pack behaviors,” the then Swedish minister of Finance, Anders Borg, said. If unchecked, “they will tear the weaker countries apart”, he warned.

But others pointed out that “speculation is only successful against countries that have mismanaged their finances for years”, as the Austrian Finance Minister Josef Proell commented.

Despite misguided behaviour after the meltdown, Thygesen believed that the markets, together with improved surveillance, “offers hope that the decentralized model for the euro area’s non-monetary policy components will work better than in the past”.

In order to protect the role of financial players in “disciplining budgetary policies”, neither an EU rescue mechanism nor ECB purchases of bonds issued by “the weakest” eurozone members “should be allowed to undermine the critical role that financial markets can play in supplementing the closer mutual monitoring of policies”.

Although he was not in favour of shielding member states under the new bailout instrument, Thygesen stressed that the rules of the new bailout mechanism should be clear on how creditors would share potential losses and the involvement of the IMF.

Eurozone members set up the European Stability Mechanism in October 2012.

EU agrees €700 billion fund to protect euro zone

EU finance ministers agreed yesterday (21 March) to boost a permanent stability fund, which from mid-2013 will hold €700 billion to shield eurozone countries from future debt crises.

But contrary to what Thygesen wanted, the ESM represented a solid “safety net”, with “clear” financial instruments to support countries in distress, as European officials highlighted.

Thanks to the new mechanism, the excessive volatility seen in the markets was left behind.

While the €500 billion bazooka was powerful enough to dissuade speculators, markets still reacted to events, including the bumpy implementation of the Greek and Portuguese bailout programs.

Thygesen was not available for comment when contacted him on Thursday (20 October).

Cinzia Alcidi, head of Economic Policy Unit at CEPS, and who has worked with the Danish economist, said he is well respected among policy makers and academics.

Thygesen is “among those who know best the EU project, its fundamental principles and above all the Monetary Union since its inception (he was part of the Delors  committee), with its limits and opportunities”.

Independent enough?

The Commission appointed Thygesen, who will lead a team of four economists. They are Roel Beetsma, from The Netherlands, the Italian economist Massimo Bordignon, Sandrine Duchêne, former advisor to French President Francois Hollande, and the former Finance Minister of Poland Mateusz Szczurek.

The role of the new European fiscal Board will be to evaluate the implementation of the EU fiscal rules. Besides, it will advise on the appropriate fiscal stance for the eurozone as a whole.

In recent years, MEPs and experts criticised the excess of austerity in the fiscal recommendations issued by the executive.

The European fiscal board, unveiled in October 2015, was the executive’s response to the criticisms aired by those in favour of stricter implementation of the Stability and Growth Pact.

The new body was foreseen in the Five Presidents’ Report, the roadmap to deepen the economic and monetary union.

But the final proposal left the guardians of rigid fiscal discipline unhappy.

Commission defends role as sole guardian of fiscal discipline

Amid growing concerns in Berlin, Frankfurt and The Hague about flexible interpretations of the Stability and Growth Pact, the European Commission ruled out the possibility of transfering the assessment of national budgets to an independent external body.

“My memory of what we decided in the Five Presidents’ Report was a little different,” Eurogroup President Jeroen Dijsselbloem said.

Dijsselbloem said last autumn that the board should not be linked to the Commission secretariat in any way, in order to provide “independent assessments of the national draft budgets, on the basis of which the commission gives its political opinion”.

The European Commission insisted that the fiscal board will be independent. Their members “will neither seek, nor take instructions from, any EU or national institution, bodies or governments, including the European Commission”, the executive said.

The Commission explained that the body would decide on its own rules. But for “practical administrative reasons” it should be attached to the executive.

“According to the views of most of my colleagues, more work needs to be done here,” German Finance Minister Wolfgang Schaeuble said after the Ecofin Council last November.

Schauble, who shared Dijsselbloem’s concern about the Commission’s increasing political oversight of national budgets, suggested recently that the ESM should take over the responsibility of monitoring them.

“The ESM would not judge budget plans in a political way, but rather in strict accordance with the rules,” he told the Stuttgarter Zeitung.

The European Fiscal Board will provide the European Commission with an evaluation of the implementation of the EU fiscal rules, including the appropriateness of the actual fiscal stance at euro area and national levels.

According to the Commission, the Board will start working shortly. It is up to the chair to convene the first meeting to set the agenda of the board.

The Board will publish an annual report of its activities, which will include summaries of its advice and evaluations rendered to the Commission.

A Memorandum of Understanding will be signed between the Board and relevant Commission services, the executive explained. The document will address budgetary and human resources, as well as access to data and information necessary for the board to carry out its tasks.

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