The European Commission recently announced proposals to enhance economic policy coordination and strengthen EU economic governance (here). They start from the right premise: ‘the crisis has shown that they [economic policy coordination instruments] have not been used to the full and that there are gaps in the current governance system’. Concrete measures are proposed, all of which strengthen the European level in economic policymaking and, in that limited sense at least, mark a step forward in economic policy coordination. Further details will follow in the autumn, also in the light of the report expected by then from the taskforce on economic governance reform chaired by Council President Van Rompuy,
The main proposals, translated into something approaching English, are as follows:
- Macroeconomic country surveillance is to be both strengthened and extended beyond fiscal policy to ‘macroeconomic imbalances’ (essentially current account imbalances). Based on a range of indicators, the Commission could recommend placing countries in an ‘excessive imbalances position’ (echoing the ‘excessive deficit procedure’ under the Stability and Growth Pact), with the Council taking the decision. Such countries would be subject to enhanced surveillance against the background of specific policy recommendations; a progressive range of sanctions in the face of non-compliance would be applied, but details will not be provided until the autumn.
- Progress in structural reform is also to be monitored with a view to the EU2020 five headline goals (higher employment, more R&D, reducing emissions, raising education levels and reducing poverty).
- At the same time fiscal surveillance under the SGP is to be tightened up. In particular less leeway is to be accorded countries with high outstanding debt. A flexible range of possible financial sanctions is envisaged short of a ‘fine’, never actually applied under the SGP.
- A ‘European semester’ (the first half of the calendar year) is to be introduced. Kicked off by a stock-taking Annual Growth Report by the Commission, it leads, via the Spring EU Summit and National Reform Programmes, to the issuing of agreed policy guidelines. The aim is to bring existing coordination processes into line in terms of timing, to ascertain European-wide policy needs (e.g. the aggregate fiscal stance) and Member States policy plans, in order to offer member states ‘guidance’ before they adopt their national budgets and other policies (in the second half of the year).
It may have taken the second-biggest crisis in the history of capitalism, with all its costs, to shake policymakers out of their complacency, but the reform proposals are belated recognition for all those who had long argued that the euro area needed greater policy coordination to work effectively. For years policymakers from all the European institutions and national governments had routinely defended the institutional status quo as optimal and derided critics as economic Neanderthals. (Don’t, however, waste your time looking for any sort of mea culpa. There isn’t one.) The proposals are more than merely rearranging the deckchairs on the Titanic. A change of course is planned.
As positive as this development is, there are four main concerns. The first is that the order to change course comes from a weak ‘captain’ and will not be implemented by the ship’s officers. The second is that the change of course may not be radical enough to move clear of the ice-field – indeed, third, may be directing the ship precisely towards a different iceberg. The fourth is that the ship has already struck ice: the hole may be too big, the ship sinking and the change of course irrelevant. Let’s take them briefly in turn.
- As is well known, the Commission proposes but the Council, i.e. the Member States collectively, and then the Member States individually (at least the big ones), dispose. The ‘captain’ of the ship of Europe is no match for the officers as a group and, depending on circumstances, powerful individual officers. Now, the ECOFIN Council has endorsed the COM proposals. They are also broadly in line with the European Council’s deliberations of 17 June and, given its rigorously insider-dominated composition, one expects there will be no major differences with the Van Rompuy taskforce due to report in October. The proposals have been drafted such that they would not require Treaty changes, making it difficult for countries to hide behind constitutional arguments. Open mutiny, then, seems unlikely. The real test, though, will be resistance by member states. Any sense of surrendering (more) national parliamentary sovereignty over sensitive budgetary issues to ‘unelected bureaucrats’ will meet resistance (and make the EU yet more unpopular). Even if political agreement is reached – as it was with the SGP – it is still not yet clear whether the ‘smarter’ sanctions envisaged will actually be applicable in practice. A likely loophole will be the contradiction between achieving the EU2020 goals (many of which imply higher public spending) and the fiscal consolidation injunctions. In short, the chain of command is long and can (but need not necessarily) break down in a number of places.
- While the proposals move beyond the prior insane obsession with the short-term fiscal position (specifically: with deficits), which completely ignored the debt dynamics of the private sector, the shift towards focusing on imbalances (the current account position) is only partial. In fact the current-account rather than the fiscal position is and should be the prime – arguably even the only – focus of EU monitoring. It is intrinsically more important. A country with a government deficit is in a fundamentally different position if its private sector is saving from one in which the private sector, too, is accumulating debt (giving rise to a current account deficit). By anchoring national current account positions within a small range either side of equilibrium (if done symmetrically), fiscal positions would automatically, but flexibly and intelligently, be constrained. The focus on current accounts and competitive imbalances implies a close monitoring of unit labour cost developments (see here). This touches on wage bargaining issues and thus on the responsibilities and prerogatives of national social partners. Yet there is no mention of these actors and how they are to be incorporated in decision-making. An obvious way to do this would be to strengthen the Macroeconomic Dialogue (MED) which brings together representatives of unions, employers, the ECB, the Commission and Council and (background here and here). A separate MED should be established for the euro area, given that unit labour costs determine the real exchange rate and are thus critical for current account imbalances. Also vital is to ensure its articulation with national-level coordinated wage setting. There appears to be a missing link here, as does there also to financial regulation and supervision, which is scarcely mentioned.
- One thing is for the proposals not to represent a radical enough break with the ‘ancien regime’; but could they actually make matters worse? This is not clear, for the devil is very much in the detail here. If one thing is worse than ignoring current account imbalances, it is fixing attention solely on deficit countries, and forcing them to adjust by means of deflationary policies: this is to ignore fundamental adding up constraints at area-wide level (which are the whole point of the European semester) and is a sure-fire recipe for ploughing straight into the iceberg of stagnation and decline. The language in the Commission document is ambiguous here: at times a more balanced (if not actually symmetrical) approach seems to be favoured, at others a very one-sided fixation with improved competitiveness in deficit countries. (And that is before the our-surplus-is-good-but-your-deficits-are-bad Germans have had their say.) On top of this, the various proposals to increase the focus on fiscal surveillance, and accelerate the fiscal consolidation drive, risk condemning the EU to low growth, as I have argued in previous columns. As noted above, forced fiscal consolidation could also threaten the achievement of important EU-mandated goals.
- Will the euro-area ship avoid sinking long enough to set sail for calmer waters? We don’t know. What is clear is that any governance reforms won’t be in place and working for some time. There are vital short-run needs that cannot be sacrificed in the supposed longer-run interest (I won’t repeat the Keynes quote). In order to keep the ship afloat we need aggressive pumping of the bilges (expansionary monetary and fiscal policy, continued support for countries facing market doubts about their solvency) and rapid repairs to the hull (especially financial market reform, and a sovereign debt resolution mechanism). Only if that is successful will we find out whether the European ship can chart a new course and avoid icebergs in the future.
These proposals are certain to be a focus of debate in Brussels and European capitals after the summer break. Progressive forces should welcome the implied Europeanisation, but work to ensure that the content of the proposals makes economic sense for European citizens and not just for powerful countries and influential social interests.