Van Rompuy’s dilemma

How often are the ones who caused the problems the right bunch to solve them?



The European Council on 17 June 2010 drew some preliminary conclusions regarding fiscal consolidation and economic governance (document EUCO 13/10). In principle, the heads of state or government are prepared to strengthen the preventive and the corrective arms of the Stability and Growth Pact (SGP). They are also willing to assess competitiveness and imbalances, as well as to create a surveillance framework for the eurozone.

The task force on economic governance is expected to report to the European Council meeting in October.

Chairman Herman Van Rompuy’s dilemma is that he has to work with the same groups of people (if not individuals) who caused the problems in the first place.

First, the national leaders created a monetary union, without economic union.



Then, Jacques Chirac and Gerhard Schröder shredded the original Stability and Growth Pact, and offered many national leaders an excuse to postpone structural reforms and stray from fiscal prudence.

The national leaders, who sit in the European Council, are the ones to determine the shape and the fate of the coming proposals.

The task force pondering improved economic governance consists of the finance ministers, who until now have never used the existing SGP sanctions, let alone proposed new ones.

In the past, the political leaders and the ministers of finance were at the root of the problem. Can they become part of the solution?




Ralf Grahn

Progress by EU task force on economic governance

Herman Van Rompuy, the chairman of the European Council’s task force on economic governance, presented the work after the second meeting, 7 June 2010.

Van Rompuy will present his progress report to the upcoming European Council meeting.



Remarks by Herman Van Rompuy, President of the European Council, following the second meeting of the Task force on economic governance (Brussels, 7 June 2010; document PCE 118/10) [headings inserted by me]

Objectives


Today, we had the second meeting of the Task Force. Today, we have been able to translate the commitment of the first meeting this into more concrete proposals on two main issues.

Let me briefly recall the four main objectives we agreed upon in the first meeting.

Firstly: strengthening budgetary discipline through the Stability Pact. Secondly, reducing the divergences in competitiveness between the Member States. Thirdly, assuring an effective financial crisis mechanism. Fourthly, improving economic governance and coordination.



Yesterday’s issues



Today, we worked on the first two points: strengthening the Stability Pact and reducing competitiveness divergences. In other words: budget surveillance and macro-economic surveillance. In these two areas, rapid progress can be made. That was clear today from the large consensus on all the main points under discussion.

Therefore, when I make my "Progress Report" to the European Council next week, I will be able to present our first orientations on these two priorities. We will take up the other two points as of our next meeting, on July 12.

We received substantial contributions from Member-States. It shows their close involvement. We could also build on the preparatory work by a group of 'sherpas'.

What did we conclude today?



Stability and Growth Pact



On the Stability Pact, we made progress on a number of elements. Each judged on itself may seem a small step; taken together however, they result in a new way of working.

Until now, the Pact mainly contained heavy sanctions at the end of the procedure: the "nuclear option". It is useful to have this ultimate option, but the Pact needs to consist of a full range a range of tools and "guns" along the way. Therefore, everybody agreed today on ways and means to review the fiscal situation of Member States at an earlier stage, and in a more graduated way.

Let me mention four improvements.

1. The first is the so-called "European semester". In the spring, national budgetary plans would be presented to the Commission and EU Member States. Of course, not to be checked in detail or to be decided upon by the European institutions! That is the prerogative of the national parliaments. However, the main assumptions underlying the budgetary plans, like the levels of growth or inflation, would be examined. So would the main aggregates, like total revenues, total spending and deficit targets.

Timing is key here. A government presenting a budgetary plan with a high deficit will have to justify itself in front of its peers, amongst Finance Ministers. Since this would take place as early as the spring, there would still be time to adjust the plans before the final budget is presented. Moreover, a national parliament would be able to judge its governments' budget plans knowing fully their credibility. Of course, we need to take into account the specificity of some countries.

2. We will also improve the Pact by creating more sanctions earlier on. Sanctions could already kick in before the 3 percent threshold for the annual deficit is trespassed, for instance if warnings have been neglected, or if the level of debt rises too quickly. To use the traffic light image: until now, you only got fined when driving through the red light of the 3 percent; from now on, you could also be in trouble when crossing the orange light. Obviously, the conditions -- under which circumstances orange is an infringement of the rules -- will have to be defined precisely. We have to define a new set of sanctions -- more progressive and consistent. We have asked the Commission to come forward with proposals on this.

3. A third element in the budget surveillance is taking the public debt level better into account. So far, the focus has been almost exclusively on the maximum annual deficit, the 3 percent of GDP. Much less attention has been paid to the level of public debt, the 60 percent. This needs to be corrected. We do not propose a special procedure for "excessive debt", but one idea could be to launch the excessive deficit procedure earlier for countries where debt is not reduced quickly enough. This could be one of the triggers for an orange light I just referred to.

4. Member States also supported ensuring the independence of national statistical offices for data provision, free from political influence.

On all these Pact-related points, there was a strong convergence of views.



Competitiveness


Let me come to the second point on the agenda: the competitiveness surveillance. Here again, we will change our way of working.

During the crisis we have learnt -- the hard way -- something we could have known all along: that sound budgetary policies are necessary but not sufficient to ensure competitiveness. Over the years, competitiveness in some Member States has improved thanks to wage moderation and productivity improvement. Others have accumulated important losses of competitiveness and balance of payments deficits on the current account. Moreover, some countries were growing quickly and had apparently sound public finances, but underlying weaknesses and imbalances, including private sector debts, provoked an abrupt reversal in times of crisis.

These imbalances are a particular problem for members of the Euro area. Countries can no longer devalue; for some economies, membership of the Euro zone acted as a "sleeping pill". We need to avoid a "rude awakening" by the market forces. Therefore we have asked the Commission to develop indicators of competitiveness; to come up with the tools aligned to this analysis. They should function as an early warning, a wake-up call. In my view we also need corrective measures for those who do not act in time when warned.

Before, it is as if we were looking at Member States’ fiscal positions through the keyhole of the annual deficit, whereas we now all want to use the bay window of their economies. Therefore macro-economic surveillance should function next to the budget surveillance of the Pact.


Progress report



I am happy about the progress made on these two main points on the agenda, in a very constructive atmosphere. I will report about it to the European Council next week. I am confident that the Heads of State and Government will share our determination to resolve these issues quickly.

The remarks by Van Rompuy contribute to the discussion on improving economic governance, but naturally credible action has to follow.




Ralf Grahn

EU Task Force on crisis resolution and budgetary discipline

The first meeting of the Task Force established by the March 2010 European Council on improved crisis resolution and better budgetary discipline will be held in Brussels on today, Friday 21 May 2010.

The Task Force is chaired by Herman Van Rompuy, President of the European Council.

Representatives of the members states, the rotating presidency and the European Central Bank will meet for the first time to start work with a view to presenting a report to the October European Council on the measures needed to reach the objectives of an improved crisis resolution framework and better budgetary discipline, says the press release from the President of the European Council.



European Council March 2010



We recall the conclusions of the European Council 25/26 March 2010 (document EUCO 7/10), where the heads of state or government mercifully acknowledged “in cooperation with the Commission” with regard to the establishment:

7. The European Council asks the President of the European Council to establish, in cooperation with the Commission, a task force with representatives of the Member States, the rotating presidency and the ECB, to present to the Council, before the end of this year, the measures needed to reach the objective of an improved crisis resolution framework and better budgetary discipline, exploring all options to reinforce the legal framework.

In the news


If official communication from the European Council has been meagre, individual leaders and politicians have launched various ideas and actions, probably adding more confusion than clarity at this stage.

Here is a brief roundup of European news sources ahead of the task force meeting.




EUobserver, Andrew Rettman: EU holds first meeting on joint economic governance (21 May 2010). The article discusses the proposals tabled by the Commission on 12 May and especially issues proposed by the German finance minister Wolfgang Schäuble.



EurActiv: Paris, Berlin struggle for unity ahead of EU meeting (21 May 2010) tells us how Germany’s Angela Merkel and France’s Nicolas Sarkozy are trying to iron out differences after the uncertainty generated by unilateral moves and ideas. Sanctions, potential French budget discipline, concerns over the euro and the Commission proposal on improving economic governance are outlined.




EUbusiness: France, Germany agree to cooperate on euro proposals (20 May 2010) says that Merkel and Sarkozy will coordinate closely at the Friday meeting chaired by Van Rompuy and prepare jointly ahead of the European Council 17 June and the G20 meeting at the end of June.




European Voice, Simon Taylor: Germany to push for nine financial reforms (21 May 2010) expected German finance minister Wolfgang Schäuble to present a nine-point plan to the Van Rompuy task force and outlined main points.




The Financial Times, Quentin Peel: Berlin pushes for global financial curbs (20 May 2010) records that chancellor Merkel will win a majority for Germany’s part of the euro stabilisation package, but fail to gain cross-party support. The article presents some proposals and positions.




Ralf Grahn