Thursday 24 November 2011

Olli Rehn on Annual Growth Survey, stability culture and eurobonds

In January 2011 the European Commission started the more integrated economic planning round known as the European Semester (Ecofin conclusions), by publishing the first Annual Growth Survey (AGS), the cornerstone document for better economic policy and governance in the European Union.

The Commission was able to start the second European Semester much earlier. The next AGS has now been published, although the Commission's Green Paper on eurobonds and other economic governance proposals stole the limelight.

Olli Rehn, who is now presented as vice-president of the European Commission and member of the Commission responsible for economic and monetary affairs and the euro, sketched the background in Berlin, Tuesday (SPEECH/11/782, English only):

Fiscal consolidation is a necessary but not sufficient condition to bring Europe back on track. Tomorrow, the Commission will present its view which reforms should be taken as a matter of urgency in our Annual Growth Survey, which kicks off the second annual cycle of economic policy coordination in the Union. First, of course, we address fiscal consolidation and the financial sector. We also outline which structural reforms are most necessary to jobs and growth, in particular as regards human capital, and how to make public administration more effective.

After discussing stability culture as the core principle of economic governance, in both monetary and fiscal policy, Rehn announced two proposals for the following day, aiming at further stability to fiscal policy of the euro area:

The first proposal underpins national stability culture by requiring numerical fiscal rules on the budget balance, in line with medium-term budgetary objectives of the Stability and Growth Pact. Such rules shall cover the whole government and be of binding, preferably constitutional, nature. You are right if this reminds you of the Schuldenbremse.

Moreover, we propose independent fiscal councils at national level to underpin robust budgetary planning. We also aim to complete the coordination of national budgetary cycles at the European level. In the so-called European Semester in the first half of each year, we evaluate the multi-annual budgetary plans at EU level. But for euro area countries, we need to make sure that the national budgets are in line with the obligations of the SGP before they are enacted. Thus the Commission should take a look at draft budgets by 15 October at the latest, and if needed issue its opinion.

Our second proposal is reserved for such euro-area countries that receive financial assistance. For them, the enhanced surveillance and the monitoring of programme conditionality will be required through law.

These proposals can be implemented within the current EU Treaties. But strengthening the Economic and Monetary Union further would require changes to the Treaty. The President of the European Council, together with the Presidents of the Commission and the Eurogroup, are now identifying what kind of changes the deepening of political and economic integration within the euro area may require in the longer term.
Rehn turned to the hotly debated eurobonds, in a manner tuned in to his German audience:

Tomorrow, the Commission will present a Green Paper on the rationale, preconditions and possible options of financing public debt through eurobonds – better called stability bonds. While the prospect of introducing stability bonds could help alleviate the sovereign debt crisis, I am also aware of the sometimes strong opposition against them.

For me, it is clear that any type of Eurobonds would have to go in parallel, hand in hand, by a substantially reinforced fiscal surveillance and policy coordination, as an essential counterpart. Stability Bonds would require that any step in the further sharing of risk would have to be balanced by provisions that ensure sustainable public finances and avoid free-riding on the consolidation efforts of others. This would have implications for fiscal sovereignty, which calls for a substantive debate in member states.

In other words, a profound reform of economic governance towards deeper policy integration is a necessary precondition for any serious move towards introducing stability bonds. Thus, the Commission's proposals tomorrow really constitute an interlinked package, which builds on the recent reform of economic governance and stability mechanisms, and at the same time outlines a roadmap towards the next stage of an ever closer and sturdier economic union, in both dimensions.
This comments offer a background to the publications the following day, and for future blog posts.

Ralf Grahn

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