EU mulls economic reform contracts but commitments remain unclear

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EU leaders are set to clash this week on whether to make EU countries receiving aid from a European reform fund adhere to binding contracts, as Germany remains vague on deal sweeteners.

The banking union will not be the only headache for EU leaders in their usual end-of-the-year meeting in Brussels on Thursday and Friday (19/20 December), as they prepare for another low-intensity clash on so-called “contractual arrangements”.

The EU jargon hides once again the thorny issue of how to bring forward much delayed structural reforms in EU countries plagued by low or no growth and high unemployment.

“Contractual arrangements” were designed to be the new instrument in the expanding EU toolbox to try to push economically unsound countries to complete their reform commitments, therefore creating the conditions for future growth in countries dominated by vested interests.

Once again, Germany is behind the new proposal to enhance the economic governance of the eurozone, and of the European Union more generally.

With contractual arrangements, countries will be legally forced to implement reforms to gain competitiveness. To date, they can be told off by the European Commission and “recommended” to carry out reforms, but they have no binding obligation to do so, as long as they do not breach the Growth and Stability Pact.

The list of countries which may be pushed to sign contractual arrangements is short, but is likely to get longer over the years.

Indeed, it does not include countries under adjustment programmes, such as Greece, Portugal and Cyprus, neither the many countries under an excessive deficit procedure (EDP), as both groups are therefore already under close scrutiny through those procedures designed to strengthen their economic governance.

Italy would be the most obvious target of the new German plan to increase EU powers. Rome has just emerged from an EDP, and has been long but vainly trying to apply growth-enhancing reforms.

France may soon join Italy in the new category of countries, swapping the controls and pressures to which it is now subject under the EDP for new obligations under binding contracts.

Not so sweet sweeteners

After years of austerity-driven policies and an enduring economic recession, Germany has been loath to ask for a new reform effort without offering anything in exchange.

Therefore, the idea of contractual arrangements goes together with “associated solidarity mechanisms”. Loans, grants or guarantees are among the options under consideration as solidarity mechanisms.

In other words, countries lagging behind in competitiveness may sign contractual arrangements which will oblige them to make reforms and will be helped in their efforts through financial support.

The form and quantity of the financial support is yet to be clarified. The plan seems balanced but the devil is always in the details, say diplomatic sources.

Italy and other potential candidates for contractual arrangements lament that too much is spelled out in the draft conclusions of this week's summit about the obligations for subscribers. “But we do not see yet much about compensations,” said one diplomat in Brussels.

Indeed the draft conclusions, seen by EURACTIV, dedicate an entire chapter to what are called “partnerships for growth, jobs and competitiveness”, accounting for almost three pages of a total of 19 (although the banking union part is still missing).

However, of these three pages, the biggest part is focused on obligations. “Contractual arrangements will cover a broad range of growth and job-enhancing policies and measures, including the performance of labour and product markets, the efficiency of the public sector, as well as research and innovation, education and vocational training, employment and social inclusion,” reads a paragraph of the draft conclusions.

Only a small section spells out the compensation measures, which are described as an option rather than a compulsory part of the contractual arrangement package. Their “exact nature, institutional form and volume” are subject to further discussion.

Moreover, the draft text makes clear that it must be ensured “that these mechanisms do not entail financial obligations for the member states not participating in the system of contractual arrangements and associated solidarity mechanisms”. In other words, Germany does not want to be forced to pay for other countries’ reforms. Where and how the money will come from is still the subject of discussion.

Another source of potential conflict is the voluntary nature of the contracts. Member states which sign them may insist that their contract should be voluntary, despite the draft summit conclusions often referring to their “binding” nature.

Since the beginning of the Greek sovereign debt crisis in 2010, and the following contagion to many other members of the euro area, the EU has taken a number of measures to strengthen the economic governance of the eurozone.

In 2011, the European semester on budget surveillance entered into force, obliging member states to submit their budget plans to the European Commission before their approval, increasing thus the EU power to suggest amendments.

Under the Fiscal Compact, the Six Pack and the Two Pack, new rules were introduced to force countries to abide by the Growth and Stability Pact and its macroeconomic targets, including deficit and debt. Fines have been foreseen for wrongdoers.

Member states have been pushed to adopt harsh reforms, especially those under a programme of financial support. Over the last years, the necessary EU austerity measures have rarely gone together with a similar push to support growth, critics say.

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