Friday 25 June 2010

ECB’s Trichet on economic governance in EMU

The EU heads of state or government have stowed away the discussions about improving European Union and eurozone economic governance into the finance minister task force chaired by Herman Van Rompuy. The task force is expected to report in October.

For the sake of transparency and informed public debate, it is therefore important that these crucial matters are debated elsewhere as well. One welcome intervention was made by the president of the European Central Bank, Jean-Claude Trichet, at the hearing of the Economic and Monetary Affairs Committee of the European Parliament 21 June 2010.

EMU responsibility

According to Trichet, policy makers have to understand the requirements of the Economic and Monetary Union (EMU):

A single market of 500 million citizens and an Economic and Monetary Union of 330 million citizens – which are among the largest and most advanced economies in the world and which are built on solid foundations in terms of human and social capital – cannot and should not be measured according to the strengths or weaknesses of their individual components alone. Particularly as regards Economic and Monetary Union, policy-makers need to internalise what it means to be part of a monetary union, in words and in deeds.

Quantum leap for economic governance needed

Economic governance must be radically improved. Benefits and responsibilities of EMU go together. Solidarity runs both ways:

The ECB believes that a true quantum leap is needed in the framework for surveillance and adjustment of fiscal policies, as well as broader macroeconomic policies concerned with Europe’s competitiveness.

“ La solidarité de fait” that Robert Schuman called for 60 years ago is reflected in the degree of economic integration and interdependence already achieved in Monetary Union. But solidarity is a two-way street. The benefits and protection that are derived from membership of Monetary Union bring with them responsibilities and obligations. This is the fundamental contract which forms the basis for our currency. We now have to turn it into a more effective structure for fiscal and macroeconomic surveillance and adjustment.

Budget surveillance

Trichet outlined the strengthening of budgetary surveillance, including prevention, correction, a wider range of quasi-automatic sanctions and formal Commission proposals:

First, it is of the essence that the surveillance of budgetary policies be strengthened. I am pleased to note that the European Council confirmed this assessment at its meeting last Thursday.

At the level of the EU27, and in particular within the euro area, we must have effective instruments to prevent – and, where necessary, correct – excessive deficits and debt levels. A more stringent implementation of rules and procedures is essential, among other things by increasing the automaticity and speed of procedural steps. The initiation of sanctions also needs to be quasi-automatic.

Fiscal surveillance must be more direct and effective. It must also be based on more independent monitoring and assessment. We may need a differentiated approach to surveillance depending on the fiscal performance of countries. The Commission should have greater responsibility by making proposals, which can only be modified with unanimity in the Council, rather than mere recommendations under the Stability and Growth Pact.

In the event of non-compliance, sanctions need to be applied much earlier and to be broader in scope. They should not only address excessive debt ratios, but also apply when countries are not making sufficient progress towards medium-term budgetary objectives. A wider spectrum of financial sanctions needs to be considered, along with non-financial and procedural sanctions, such as more stringent reporting requirements or even a limitation or suspension of voting rights.


Broader economic reforms and surveillance of macroeconomic policies are needed to enhance competitiveness and prevent imbalances:

The second area may appear more novel, both at the level of the European Union and at the level of the euro area, but the ECB has in fact been stressing it in the Eurogroup since at least 2005: the surveillance of policies to maintain Europe’s internal and external competitiveness – policies to raise productivity, to enhance people’s skills and to improve firms’ competitiveness. These policies go well beyond the tradable sector. They must also encompass the non-tradable sector, including the public sector, since it too is decisive for the competitiveness of an economy as a whole.

Conscious management of wages and costs in order to maintain a healthy position for the economy within a competitive environment – this should be the core focus of such broader macroeconomic surveillance. The reason why competitiveness should be the main focus is not that countries should pursue export-oriented policies or boost international market share. The reason is that within a monetary union, the relative competitiveness of economies captures very well the sustainability of price and cost developments.

I am pleased that last Thursday’s European Council confirmed the need for an effective surveillance framework in this area. Experience has shown that persistent divergence in this regard is detrimental both for Member States and for Monetary Union as a whole.

As with fiscal surveillance, this framework needs to allow for targeted and differentiated surveillance and follow-up measures. For countries that experience significant losses of competitiveness, surveillance should become increasingly deep and detailed. More ad hoc reporting and dedicated country missions, policy recommendations, compliance requirements, public peer pressure and gradual financial steps to encourage compliance could all be part of that process.

For this to work, we need a transparent and effective trigger mechanism to determine the intensity of vulnerabilities and surveillance. This should be based on close monitoring and reporting by both the Commission and the ECB. Experts are currently developing ways to best capture the complexity of the issue, as well as procedures by which indicators could be used in a surveillance and adjustment framework.

If we can put in place effective surveillance and adjustment frameworks for both fiscal and competitiveness policies – and if we can ensure through appropriate regulation that our financial system serves the real economy and not the other way around – our European Union and our Economic and Monetary Union will exit this crisis much stronger than before and will be very well placed in the global economy.

Wise public spending and growth oriented reforms are needed, but the Economic and Monetary Union is far from over, if our political leaders grasp the nettle.

Ralf Grahn

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