Reports

Lisbon and the Stability and Growth Pact: Working for Recovery

26 January 2005


Joaquìn Almunia, European Commissioner for Economic and Monetary Affairs, addressed an EPC breakfast briefing on “Lisbon and the Stability and Growth Pact: Working for Recovery.” EPC Chief Executive, Hans Martens, chaired the meeting.  A question and answer session followed. This is not an official record of the proceedings and specific remarks are not necessarily attributable.

Summary

Mr Almunia said the Commission faced a double challenge – revising the Lisbon Strategy to maintain job and growth targets and reforming the Stability and Growth Pact to maintain economic and monetary discipline in the eurozone. The two were complementary and not, as some suggested, contradictory. Both debates were now going on in earnest with a view to agreement at the EU Council Summit in Brussels on March 22/23. On Lisbon, the challenge was to ensure that Member States were “permanently engaged” in the process. On the Stability and Growth Pact, the challenge was to shift the focus more towards tackling public debt rather than concentrating so heavily on deficits. But the 3% deficit ceiling requirement remained valid and non-negotiable in the changes being considered to the Lisbon Strategy. The Commissioner, warned: “We cannot have solid growth without fiscal and budgetary discipline.”

Event Report

Mr Almunia praised the euro as one of the most important success stories in the EU in the last 20 years. By its own standards, the eurozone growth rate of 2.1% last year was very good, and the euro was in a recovery period. But measured against world economic growth, the figure told a different story. During 2004, the growth rate in the world economy hit a 13-year record of 5%, leaving the eurozone figure far behind.

The eurozone growth problem was characterised by a lack of dynamism in the economy. The EU economy had to be more flexible and competitive: “We need to review the way the economic system works – that is the main goal of the Lisbon Strategy improvements,” said the Commissioner. That meant bridging the “implementation gap” to increase growth potential: “We have defined a very good objective but now we need to be able to put in place the necessary reforms.”

Simultaneously with this Lisbon Strategy review came the revision of the rules underpinning Economic and Monetary Union. The single currency was now very strong, with price stability, inflation on course to meet the 2% target this year, low interest rates and a decent degree of economic stability. There was no need to alter the Stability and Growth Pact reference values for fiscal discipline - public deficits to be kept no larger than 3% of GDP and public debt running at no more than 60% of GDP, the Commissioner insisted.

Some people felt there was a contradiction between sustainable growth and the fiscal stability of budget discipline, but Europe could not achieve solid growth without fiscal and budgetary discipline. Thus, the two essential targets of the current twin review were dynamic growth and the smooth functioning of EMU – both goals attainable in time for the March summit.

The ongoing discussions between EU finance ministers were scheduled to continue: two more gatherings were set between now and the summit, with the Commissioner “optimistic” of a deal.

He said the recent and continuing talks could be broken down into six areas:

1.  Linking the Stability and Growth Pact to incentives to enable national treasuries to ride out the economic “bad times” as well as roller-coasting through the “good times”:

Mr Almunia referred to the difficulties of Member States refusing to follow Commission proposals to implement the Pact rules on excessive deficits in 2003, which caused grievances with France and Germany. Today, there were no fewer than ten Member
States facing excessive deficit procedures and the other two, Greece and Hungary, would be receiving new reports soon. But, said Mr Almunia, the main problem was the “other side” of the Pact – the preventative part designed to ensure that Member States consolidate public finances during the “good times.” The Commission was therefore trying to establish incentives to provide a clearer framework to persuade the Member States to adopt “good policies in the bad times,” so they could avoid “bad policies in the good times.”

2. How the define the necessary instruments to achieve the Pact goals:

The medium-term objectives for balancing public finances in each Member State had to be defined. These objectives would vary from country to country to cope with huge discrepancies between Luxembourg and Estonia at one end, with GDP debt levels of around 5%, to Italy and Greece at the other end, with GDP debt running at more than 100%. Then it had to be established whether public finances were going in the right, sustainable, direction. Suitable “adjustment paths” had to be found for each country, relevant to its financial position. If these objectives could be clearly defined and achieved, governments would not need to breach the 3% rule in the bad times.

3. How to take account of structural reforms in the Member States:

The aim was to encourage Member States to implement new structural reforms for Lisbon Strategy growth while upholding the Stability Pact aim of sustainable public finances. The Commission had to ensure it did not send contradictory signals to Member States when making recommendations. It was up to Brussels to establish the links between Lisbon and the Pact.


4. How to deal with debt levels:

Thus far the focus has been mainly on the deficit figure, which remained very important. But there was now a need to focus also on “debt dynamics,” monitoring Member States’ progress. Some countries were resisting very strict debt criteria and the Commission was now discussing which mechanisms to employ, to give the Pact more emphasis on “debt evolution.”

5. What to do with the excessive deficit procedure:

The Commission would not move on the deficit limit, said Mr Almunia. The criteria were set out in the Treaty and should remain unchanged. But there was a need tackle current rigidities, improving the deadlines on adjustments to take account of structural reforms in the various Member States. The most important thing in this area was the use preventative measures to ensure ‘good policy in bad times.’

6. Governance:

Here the aim was to avoid conflicts such as the 2003 impasse over France and Germany. There had to be cooperation between the Member States and the Commission, but the Commission would not give up its powers in this area. However, a “sense of ownership” of in the existing rules-based system had to be created at national level, with improvement in the statistical data to end the kind of problems which arose recently with the publication of incorrect Greek economic statistics.

Mr Almunia admitted there was some way to go before agreement was assured. Some Member States held positions that were “more flexible” than the Commission’s position. Others were sticking to “more orthodox” views. But neither camp appeared to be too set in its ways and there was high hope of agreement: “I will do my best,” promised the Commissioner.

The chairman thanked Mr Almunia for his clear and engaging presentation and for his open and an enthusiastic engagement in the debate with the audience. He wished the Commissioner luck with the forthcoming negotiations and invited him to come back to the EPC and report on progress in the near future.