Thursday 10 June 2010

EU aim: Quality and sustainability of public finances

Despite the Brussels jargon, the ten ‘Europe 2020 integrated guidelines’ should make Europeans sit up and take notice. These policy aims concern the bread and butter issues for this decade. Success or failure decides our jobs, pensions, living standards and quality of public services; in short: prosperity.

On 17 June 2010 at the European Council meeting, the heads of state or government are going to add their remarks to the proposed objectives ahead of final adoption.

The blog post Adopting EU broad economic policy guidelines (BEPGs) looked at the procedure and context, and the entry EU’s proposed BEPGs (broad economic policy guidelines) presented an overview of the BEPGs and their relationship with the guidelines for employment policies. Together they form the ‘Europe 2020 integrated guidelines’.

Public finances

The first guideline in the Ecofin Council’s report to the European Council (document 10262/10) is:

Ensuring the quality and the sustainability of public finances

The financial crisis and the economic downturn put severe strain on public finances, now seen in the form of the European sovereign debt crisis and the rude awakening in the eurozone.

Almost all EU member states now accumulate debt at an unsustainable pace, and many of the economies are burdened with heavy levels of government debt.

Among the most developed in the world, several EU members have been forced to call in the International Monetary Fund, and the IMF has undertaken to stand ready for the collective defence of the euro area.

During the last weeks and days, a number of member state governments have slammed on the brakes and hastily announced major budget cuts for the coming years, in some cases even with immediate effect.

Strikes, protests, social unrest and hardship are on the menu, not only in the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain), but in most EU member states, not forgetting the difficulties in the new members in Central Europe.

Panicky reactions take the citizens by surprise and cause anger, but somehow the governments should be able to return to more sustainable and predictable policies.

The Ecofin proposal sketches a virtuous path towards better economic governance (page 8):

As part of comprehensive ‘exit strategies’ for the economic crisis, Member States should carry out ambitious reform programmes to ensure macroeconomic stability and the sustainability of public finance, improve competitiveness, and reduce macroeconomic imbalances and enhance labour market performance. Temporary measures introduced in response to the crisis should be withdrawn in a coordinated manner as appropriate when the recovery is secure. The withdrawal of the fiscal stimulus should be implemented and coordinated within the framework of the Stability and Growth Pact.

Quality and sustainability of public finances

Here is how the representatives of the member states see the common challenges and needed actions (page 12 to 13):

Guideline 1: Ensuring the quality and the sustainability of public finances

Member States should vigorously implement budgetary consolidation strategies under the Stability and Growth Pact (SGP) and in particular recommendations addressed to Member States under the excessive deficit procedure, and/or in memoranda of understanding, in the case of balance-of-payments support. In particular Member States should achieve consolidation in line with Council recommendations and meet their medium-term objectives in line with the SGP. Without prejudice to the legal framework of the SGP, this implies for most Member States achieving a consolidation well beyond the benchmark of 0.5 % of gross domestic product (GDP) per year in structural terms until debt ratios are on a solid declining path. Fiscal consolidation should start in 2011 at the latest, earlier in some Member States where economic circumstances make this appropriate, provided that the Commission forecasts continue to indicate that the recovery is strengthening and becoming self-sustaining.

In designing and implementing budgetary consolidation strategies should focus on expenditure restraint and prioritise growth-enhancing expenditure items within for example areas such as education, skills and employability, research and development (R&D) and innovation and investment in networks with positive impacts on productivity, where appropriate for example high-speed internet, energy and transport interconnections and infrastructure. Where taxes may have to rise, this should, where possible, be done in conjunction with measures to make tax systems more employment, environment and growth-friendly for example by shifting the tax burden towards environmentally harmful activities. Tax and benefits systems should provide better incentives to make work pay.

Furthermore, Member States should strengthen national budgetary frameworks, enhance the quality of public expenditure and improve the sustainability of public finances, pursuing in particular determined debt reduction, reform of age-related public expenditure, such as pensions and health spending, and policies contributing to raising employment and effective retirement ages to ensure that age-related public expenditure and social well-fare systems are financially sustainable.

Budget efficiency and quality of public finances are also important at the EU level.


Is it going to be different this time?

When reading the economic and employment guidelines for the decade ahead, we are confronted with the missed targets of the Lisbon reform agenda for growth and jobs, regulatory and supervisory failures regarding reckless financial operators and weak coordination of economic policies between member state governments, despite the Stability and Growth Pact.

The intentions and programmes have not been bad, but coordination, open or otherwise, between ‘sovereign’ member states can hardly be seen as a success story.

Since the Lisbon Treaty mainly leaves these policy areas and powers unchanged, credibility remains a big question.

It is not the sole prerogative of the United Kingdom to reframe questions of needed powers at the right level in sterile terms of ‘sovereignty’: the assured power for all to hang separately.

Vestigia terrent, said the fox.

Ralf Grahn

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