Europe's Political Economy

The new model of economic governance - a quantum leap?

Janis Emmanouilidis, EPC Senior Policy Analyst, proposed three broad sets of questions to be addressed: whether the changes are indeed a quantum leap; whether the proposals are sufficient, or do they go too far, opening the door to a ‘transfer union’; and whether the Euro Plus Pact is a significant innovation?

Lucio R. Pench, Acting Director for Fiscal Policy, DG Economic and Financial Affairs, European Commission, provided an overview of economic governance proposals from the Commission; expenditure benchmarking focused on the control of expenditure, and a debt benchmark. He presented proposed requirements for strengthening national fiscal frameworks: accounting and statistics; macroeconomic and budgetary forecasts; numerical fiscal rules; medium-term budgetary frameworks; and transparency of general government finances. With respect to macroeconomic issues the Commission is proposing a new procedure for macro-economic imbalances.

Sharon Bowles, MEP, Chair of the Economic and Monetary Affairs Committee at the European Parliament, said that the EP had been very busy trying to agree a set of proposals. In general, it wanted more emphasis on investment for growth. The EU needs better bank stress tests, and contagion will not be halted until the banking problems are solved. The crisis is really about long-term investment, and a ‘swathe of legislation’ makes it difficult. Unless these issues are resolved they could lead to more problems, and a Catch-22 situation.

Manfred Neumann, Emeritus Professor of the University of Bonn, was unsure whether the new economic governance model was a quantum leap. The crucial points were automatic sanctions, and insolvency. He was uncertain that the rescue packages will provide a solution in the medium to long term; ultimately countries need stable democratic government. The treaty change is fine, but there may be problems ratifying it in Germany. If some countries had to leave the monetary union, this would not necessarily be a problem as long as the larger countries stay together.

Fabian Zuleeg, EPC Chief Economist, emphasised how much progress has been made. One part of the new institutional architecture that has been underestimated is the role of President of the Council. However, there are still problems in the implementation mechanism, and many other principles that the EP has yet to sort out. There is also the problem that countries receiving support may be unable to keep to the austerity measures they have agreed. Public finances are ‘still pretty bad’; there is a danger of countries spiraling downwards into political problems as well. However, economic necessity would drive future economic developments.