Fit for the future? EU economic governance after the crisis

1 December 2009

Hans-Gert Pöttering MEP, and former President of the European Parliament, said the Lisbon Treaty, which had just entered into force, strengthened the EU’s economic governance and gave the euro zone a legal basis.

He introduced the book Liberalism in Crisis? by the EEGM (an international network of five European think tanks) that analyses the deepening economic and financial crisis. Despite a grim prospect, EU governments have resisted economic nationalism and are developing “European” solutions to the crisis. But two concerns remain: the continuing bonus system for banks, and the need to prevent EU Member States exceeding Maastricht spending limits.

Jacques Mistral, Head of Economic Research, Institut français des relations internationales, said the European public is increasingly sceptical about globalisation’s benefits, as unbridled capitalism cannot work without rules, so the G20 grouping should devise policies for the exit strategy.

The BRIC (Brazil, Russia, India and China) countries demonstrate that different forms of capitalism are emerging, so Europe must not be marginalised and must work with the US to draw up new economic rules.

Vanessa Rossi, Senior Research Fellow, International Economics Programme, Chatham House, said as the recession was deeper and the ‘bounce back’ less than predicted, the world is moving into lower growth. Politicians failed to respond to global effects, which were exacerbated in the European Union by internal problems and the new EU Member States worse affected.

Although lower growth means higher unemployment, risky growth must be avoided. Banks and industry need to keep bigger reserves, and the issue of banks or business which are ‘too large to fail’ must be addressed.

Daniela Schwarzer, Head of the Research Unit, EU integration, Stiftung Wisenschaft und Politik, said the European Central Bank had demonstrated its value by reacting so quickly; recent debates have highlighted the limits of EU-wide solidarity, with many euro zone countries focusing more on their own problems. One must maintain the credibility of the European Monetary Union (EMU) and keep to the Maastricht 3% criteria for the Solidarity and Growth Pact (SGP), and politicians must stay focused on tackling potential risks.

Carlo Seechi, Vice-President, Istituto per gli studi di politica internazionale, said the euro zone’s ability to get through the crisis showed that Europe’s economic governance was improving. He was unsure whether we have passed the crisis, but insisted on the need to continue coordinating efforts and searching for solutions.

One of the Union’s challenges is that it is brings together heterogeneous economies, making it difficult to carry out common actions, so we need consistency in a system that respects national and regional heterogeneity.

Fabian Zuleeg, EPC Senior Policy Analyst, said returning to a pre-crisis position   would endanger the European Social Model, as some countries are very close to the 3% Maastricht criteria. Lower growth rates will affect public finances although governments still continue to spend, and risk must be managed better to give more room for manoeuvre in case of future crises.

We need to revisit the SGP, strengthen fiscal sustainability, correct the balance between tax and spending, and assess the availability of European funds.

Marco Buti, Director-General, DG Economic and Financial Affairs, European Commission said the ECB emerged “with flying colours” from the crisis, and the EU’s fiscal market response was “timely, temporary and targeted”.

Member States’ use of state aid provided both a short-term policy response and a long-term regulatory response, and EU, IMF and World Bank support for Hungary, Romania and Latvia prevented a melt-down in Eastern Europe.

Europe’s approach to surviving the crisis has influenced the G20’s global response, while the Lisbon Treaty gives EU Member States more leeway to shape the exit strategy.

Sylvie Goulard MEP, Vice-President of the Monetary Affairs Committee and President of the European Movement, said the EU was “thinking in the box”, and failed to realise the severe social effects on ordinary people. The Single Market is in danger, so it needs rules and supervision to ensure it functions effectively, with a common European stimulus package and a common bank rescue package. Europe’s young people will inherit the debts, and will lose faith in the EU if we do not act now.

Marc Stocker, Director of the Economics Department, BUSINESSEUROPE, said the situation was far better than had been expected, but Europe’s recovery lags behind the rest of the world, with a massive deterioration of public funds.

There must be a new partnership between regulation and markets; companies need access to finance; a new financial market regulation is needed, and public finances must be consolidated. Other priorities are to introduce market reforms and stricter supervision of the financial markets; boost internal markets, ensure more flexicurity and modernise the EU budget.