The Future of the EU: Shaping economic governance

Daniela Schwarzer

The Triple Crisis Blog is pleased to welcome Daniela Schwarzer, head of the European Integration research unit at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP), as a regular blogger.

The EU is heading for a crucial European Council meeting. On March 24/25, all eyes (in particular those of market actors) will be on the 27 Heads of States and Government who will tackle important questions on Economic Governance and on the future architecture of the euro area.

A broad debate has developed in the last twelve months drawing conclusions from the way the financial, real economic and sovereign debt crises have struck the EU. There is a growing gap between the academic view on where the euro area should move and the likely outcome of the current reform process: More and more observers advocate a leap forward in terms of political and fiscal union. But there is no political consensus on substantial budgetary integration, e.g. a larger European budget (ideally with a stabilizing function) or a pooling of public debt by issuing joint Eurobonds (as has been suggested for instance by Eurogroup President Juncker and the Think-Tank Bruegel).

The willingness of the governments to accept more integration at the cost of national sovereignty erodes as the initial shock of the crisis fades away. But still, the governance architecture of the EMU is likely to change.

Firstly, 12 years after the Euro’s creation, it is finally common sense that the monetary union has specific coordination needs. Up to last year, for example, the German government refused a regular euro area summit, arguing that economic governance should concern all 27 EU members alike. This spring, several measures applying only to the euro area will be decided, the most prominent being the so-called European Stability Mechanism that is to solve sovereign debt crises when the current emergency agreements run out in 2013. The European Monetary Union will hence become a more closely integrated core of the EU.

In budgetary policy co-ordination, the rules and sanctions of the Stability and Growth Pact will be hardened (see the legislative package tabled by the European Commission). But member states will probably stop short of introducing a quasi automatism, leaving implementation to political decisions in the Council of Finance Ministers, and we have seen what happens when peers have to sanction peers…

But this reluctance will not be the make-it-or-break-it issue for the Euro, despite the fact that most political attention is directed towards the reform of the Pact. Only one of the euro area’s troublesome cases – Greece – would have been prevented had the envisaged reforms been in place. Ireland or Spain would have run into trouble anyway, as their problem is not irresponsible fiscal behavior but competitiveness gaps combined with unstable banking sectors. For these problems, tougher control mechanisms for budgetary policies are no solution.

This is why economic policy co-ordination is also on the EU’s agenda. Two of the legislative acts currently in the decision-making process concern a mechanism to correct macro-economic imbalances in the euro area. The initial proposal by the Commission could theoretically oblige both deficit and surplus countries to correct policies in the case of excessive imbalances. But as the negotiations evolve it seems that attention will be only or overwhelmingly on the deficit countries.

In addition, German chancellor Merkel and French President Nicolas Sarkozy have proposed a so-called Pact for Competitiveness which suggests that euro area member states should coordinate economic and social policies more closely, for instance regarding pension ages, corporate taxation, surveillance of wage developments etc. From the perspective of many euro zone members this proposal consists in imposing the German growth and welfare model on the whole of the monetary union, which is one of the reasons why the proposal met strong opposition at the last EU summit February 4.

The underlying debate remains unresolved: Can economic divergence be reduced under the condition that only the weak member states change policies? Greece, which has fallen into a debt-recession trap, seems to illustrate that this is not the case.

This leaves us with the question whether the European leaders are actually fighting the problems that have caused the crisis. Not only may the imbalance problem not be solved as quickly as expected. Insufficient attention is also paid to the banking sector. The stress tests of last summer have been criticized for hiding the problems. Recapitalization needs seem to be much higher than publicly admitted and cross-border restructuring should take place in the EMU. So, under the pressure of a possible next round of the crisis, the European policy agenda may well change again.

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