28/09/2011

The European Economic Governance Package
Parliament achieves stronger powers for the Commission

By Christian Scheinert, Adviser on the Economic and Monetary Affairs Committee

Parliament has come to an agreement with the Council and the Commission on the European Governance Package. This is widely considered to be one of the most important dossiers of this legislative term. It will have a deep impact on the economic and fiscal policies of the EU.

'European governance' is a term that has not been clearly defined. The term oscillates between European [economic] government, which is understood to be a central institution taking over a number of economic policy topics and tasks now carried out at Member-State level on the one hand, and the general, rather vague framework of decision-making in the field of economics at the European level on the other hand. The Lisbon Treaty does not provide for the former definition, so it is prudent to stick with the latter. However, the Treaty shows a much stronger will to consider the economic policies of the Member States as being of common interest and to act accordingly, which will amount to a higher degree of European economic co-ordination. This new approach hasn't been fully translated into reality yet.

The eurozone

Recent events in Greece, Ireland and Portugal have shown that economic and fiscal policies in the Member States that have adopted the euro need a higher degree of surveillance and coordination. The assumptions that there would both be economic convergence within the eurozone and a prudent approach to budgetary policy in all Member States proved to be wrong.

Wages that increased much faster than productivity led to balance-of-payment problems in a number of Member States whose international competitiveness eroded continuously. The adoption of a common currency makes it impossible to hide a lack of competitiveness through devaluating the currency. The only escape left within a monetary union is to adapt wages and to increase competitiveness. This is not what happened. In a number of Member States wages went up dramatically whilst productivity didn't. This led to balance-of-payments problems, first and foremost in Greece.

The second assumption, one concerning prudent budgetary policy, was based on the belief that the Stability and Growth Pact (SGP) would be sufficient to avoid major strains on the common currency. It proved not to be so. A lenient approach to the deficits accumulated in France and Germany paved the way to an ill-fated reform of the Pact in 2005. Again it was Greece which was first to run into deep trouble when the issuance of government bonds at moderate interest rates became impossible.

There was a threat that these events occurring in one country would endanger the eurozone as a whole, possibly even creating a domino effect. This is when a decision was taken to create a number of ad-hoc mechanisms, first to provide the Greek government with affordable loans, then to prepare for coping with balance-of-payments problems, should these occur. None of these mechanisms were planned as long-term; they are provisional ones. Also, their compatibility with the Treaty's arrangements and spirit is still a somewhat open question. The International Monetary Fund (IMF) is providing additional loans. All these loans are given on strict conditionality, amongst others entailing deep structural reforms as well as cuts in government expenditure.

The ad-hoc mechanisms are scheduled to be wound down in 2013 and will be replaced by the European Stability Mechanism (ESM). The introduction of the ESM necessitates a small Treaty change, which has since been adopted but whose ratification by a number of Member States is still pending.

The Task Force

In 2010 the European Council put a Task Force, chaired by its President, Herman Van Rompuy, in place in order to make proposals in the field of European governance. It foresees the strengthening of the Stability and Growth Pact, whose preventive arm should be improved, and the potential introduction of sanctions at earlier stages than foreseen with the present SGP. The Task Force was looking at ways to increase the cost of non-compliance with the rules through a system of 'intelligent sanctions'. Furthermore, the Task Force was a leading force in the establishment of a 'European semester', during which EU finance ministers would discuss the sustainability of their budget, with a special focus on the evolution of public debt.

On 7 September 2010 the Council endorsed changes to the manner in which the EU's Stability and Growth Pact is implemented in order to allow for such a 'European semester' to be introduced as part of a reform of EU provisions on economic policy coordination.

A differentiation will be made between Euro and non-Euro Member States, as well as between non-Euro Member states with an opt-out clause and those which will become part of the eurozone.

The Council's position in negotiations on the European Governance Package was based on the Task Force's conclusions.

The Governance Package

An increase in competitiveness will be the centre-piece of improved macro-economic surveillance, which would focus on those imbalances that threaten economic growth. A key element that will be scrutinized is public wages, including their spill-over effects on wages in the private sector. (This should be read carefully: it doesn't mean that those countries that are internationally competitive should be prevented from performing, but that those which are not competitive should be encouraged to become so.) An important structural reform that will have to be carried out in several Member States concerns the labour market. Further support for increasing competitiveness will stem from the EU 2020 strategy.

The package consists of 6 pieces of legislation:

• a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies;
• a Council Regulation amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure;
• a Council Directive on requirements for budgetary frameworks of the Member states;
• a Regulation of the European Parliament and of the Council on the enforcement measures to correct excessive macroeconomic imbalances in the euro area;
• a Regulation of the European Parliament and of the Council on the effective enforcement of budgetary surveillance in the euro area;
• a Regulation of the European Parliament and of the Council on the prevention and correction of macroeconomic imbalances.

The first two of these six dossiers were allocated to the EPP Group, which nominated Corien Wortmann-Kool and Diogo Feio as Rapporteurs. The EPP Group pushed for greater fiscal discipline as well as reforms aimed at increasing competitiveness. It supports an increased importance of the debt criterion in the Stability and Growth Pact. Member States will be more encouraged to keep their overall debt under the ceiling of 60% of GDP. Alert mechanisms which signal macro-economic imbalances will be introduced. The aim is to identify potential problems as soon as possible in order to take corrective actions before a Member State runs into balance-of-payments difficulties or risks defaulting on its sovereign debt. A particular aim of the European Parliament (EP) is to reduce the influence of political bargaining within the Council when it comes to taking country-specific decisions. To this end the EP fought to use as much as possible the Reversed Qualified Majority Voting (RQMV) - a system which requires Member States to ask for a vote against sanctions proposed by the Commission, rather than having to approve them each time, thus increasing the powers of the Commission within the framework of the SGP.

An agreement between the European Parliament and the Council was reached in September 2011. It reflects all of these positions