Session 6: Economic Governance in the Monetary Union

Jun 28th, 2010 | Category: Session 6

11 June 2010

The session addressed the issue of economic governance focusing on the following three questions:

I. What went wrong?

II. How is it possible to repair it?

III. How is EU policy-making changing and expected to change further in the new context?

The weaknesses in EMU economic governance. European integration is at a crossroad. It has reached an intermediate position between national policy-making and full coordination that does not represent a stable equilibrium. It will either progress towards economic governance or fiscal and monetary nationalism. A large part of the problem is that national policy-makers have failed to internalize the change that was coming about with EMU with the result that there was little policy coherence and in turn a weak sense of ownership of EMU rules.

There are three areas in which stronger and better coordination is needed. These are: i) fiscal policy, ii) private sector financial imbalances, and iii) wage developments.

• The euro-area lacks a common fiscal policy meaning that no institution is responsible for determining the size of the aggregate fiscal stance. This resulted in a very weak response to the crisis with respect to the US. In addition, no clear assignment of obligations favoured free-riding which adds to the lack of an aggregate fiscal stance.

• The problems are not only fiscal in nature. There has been also a neglect of private sector financial imbalances. Bail-outs of the financial sector by the government may result into severe fiscal imbalances and thus represent an important source of instability.

• Finally, wage developments have been quite diverse, which lead to severe competitiveness divergences.

Finding solutions. To a large extent, weaknesses in EMU economic governance are due to lack of enforcement rather than to the lack of actual rules. But they also signal underlying tensions that can only be addressed if the entire policy framework is re-define in a way that makes it more effective but at some time realistic.

The failure of the Growth and Stability Pact is to be ascribed to weak enforcement but also to the fact that there is no attention to the aggregate fiscal policy stance and that its distinctive deterministic approach is in contrast with the stochastic nature of the world. A few possible improvements to fiscal governance were suggested:

• The EU Commission together with the Council should define a target for the aggregate fiscal stance over the medium-term.

• Countries should be forced to behave fiscal also in good times.

• Besides deficit levels, the Pact should also introduce expenditure rules.

Competitiveness developments need also closer monitoring. It was suggested that the EU Commission provide guidelines to make sure that wage growth is line with productivity and consistent with the ECB’s inflation target. It was noted that the feasibility of this mechanism is a function of the national wage formation regime and may even require cross-country coordination in wage bargaining, which might be at this stage unrealistic.

Surveillance should be extended beyond budgetary positions. For example, it might be necessary to put in place an early warning mechanism that detects financial unstable positions before they turn into severe busts. The ECB seems the best candidate to fulfil such a function and its mandate should be extended from price to financial stability.

More generally, it was stressed that EMU objectives have a better chance of being achieved in a more decentralised system. Some others noted that decentralization is not a solution to the problem. For example, financial regulation is not apt to be decentralised. In the fiscal realm, instead, it is an unrealistic target insofar as national parliaments show little interest and knowledge of EU policy-making. But an alternative and equally realistic scenario is that institutional reforms at the domestic level and market forces operate in such a way that the system becomes even more asymmetric with Germany acting as an anchor. It was observed that a system in which Germany plays the role of the hegemon might not be realistic over the medium-term.

Whatever the direction taken, it will be necessary to redefine the relationship between ex ante surveillance, to which the previous regime was mostly geared, and ex post resolution.

The changing face of EU policy-making. Economic governance has been a neglected chapter in the Lisbon Treaty but it came back to the forefront as a result of the crisis. The crisis revealed the inefficiency of the Eurogroup in addressing the emergency, thereby confirming that EMU is still far from being an area of shared competences. The handling of the crisis suggests something about the direction EU policy-making is taking.

Firstly, the ECOFIN and the Eurogroup have been mostly out of the picture with decisions being mostly taken at the Presidency-level. Secondly, we witnessed an increasing role for the European Parliament. The Parliament increased its legitimacy and visibility but remained subject to various constraints and veto points. Thirdly, the original triangle of institutions has been replaced by a quadrangle that includes the European Council. This Brussel-isation of policy-making was curiously accompanied by the (re)-emergence of politics, not only standard electoral but also symbolic politics.

As to future prospects, the indication is for a hybrid-isation of decision- and policy-making with the growing importance of intergovernmental bargaining not least because the Lisbon Treaty’s provisions require additional negotiations to be implemented.

Rapporteur: Benedicta Marzinotto, Bruegel

• Peter Bofinger,“Economic Governance in the Monetary Union: The shape of Economic Governance”

• Antonio Missiroli, “The Debate about Political Union”

• Jean Pisani-Ferry,“The Euro Area Governance: What went wrong? How to repair it?”