Competitiveness Pact 'was never the blueprint people thought it was'

11.03.11 @ 09:29

  1. By Leigh Phillips

BRUSSELS - A pact for boosting the eurozone's competitiveness that has been met with stiff resistance from a number of member states now appears to be taking a back-seat to wider EU economic convergence plans.

  • The Bundestag: Right-wing lawmakers have attempted to tie the hands of Chancellor Merkel (Photo: Deutscher Bundestag/Stephan Erfurt)

Diplomats are suggesting that eurozone member states are unlikely to reach agreement on the Franco-German proposed Competitiveness Pact - a document subsequently taken up by European presidents Herman Van Rompuy and Jose Manuel Barroso in an effort to win wider support for the proposals - at a special summit of the 17 EU states that use the single currency on Friday.

"The Competitiveness Pact isn't exactly dead, but if anyone thought this was going to be the blueprint for EU economic governance, well, it's not," one EU diplomat from a country supportive of the pact's proposals told EUobserver regarding discussions on the matter.

A diplomat from another state, said he saw "only a contingent agreement on the broad outlines of the overall package," at Friday's eurozone summit and that any deal is not envisaged until all 27 states meet at a separate summit at the end of the month.

The balance appears to have shifted away from the Competitiveness Pact back towards a series of six proposed directives on economic governance first put forward by the European Commission last September.

The discussion now is of "integration of the pact within existing processes within the Union," said one source, referring to the commission 'six pack' currently wending their way through the EU legislative factory.

Another diplomat told EUobserver: "The pact is good for pressure; it's a bonus. But the commission's proposals involve sanctions. The six-pack, if fully implemented, means that things are now in the hands of the whole; countries can't fiddle the books any more. It will be difficult to disobey in a way that with peer pressure you still can."

Yet another analysis by a member-state source reported: "Van Rompuy hopes to get substantial agreement on many points, but it's yet to be seen even whether we'll be able to move beyond agreeing on a set of principles."

The reworked Barroso-Van Rompuy proposals had contained a laundry list of liberalising demands, including wage restraint across the eurozone; limiting public service spending; constitutional changes limiting government borrowing; raising retirement ages and moving away from labour-based taxation towards consumption-based taxation.

The effort, widely seen as what Germany was demanding in return for agreeing to a boost to eurozone bail-out facilities and easing the rules governing the rescue fund, met with stiff resistance from a wide number of member states.

Many were unnerved in particular by suggestions that they change their constitutions to keep a rein on government borrowing while others also opposed requirements that inflation-indexed wages be abolished.

Last week, a fresh, watered-down version of the proposals, renamed a 'pact for the euro', was tabled in the hope that a dilution in their stringency would be sufficient to bring the rest of the eurozone on board.

The new pact paper now says that a constitutional 'debt brake' is just an example of what can be done; pension adjustments would be optional and 'adjustment' rather than abolition of wage indexation would now be performed "where necessary". Earlier demands "to enhance decentralisation in the bargaining process," have since been replaced with slightly more moderate wording that would see reforms to "adjust the wage-setting arrangements, notably the degree of centralisation in the bargaining process."

The latter demand has infuriated trade unions around the bloc, not least within the core eurozone countries, as Germany, Finland, the Netherlands and Austria all have institutionalised central bargaining.

A further draft was due to be tabled on Thursday.

Crucially, whatever policy mix is chosen, it is now to be decided by the member state concerned, rather than set down in stone via a competitiveness pact.

"Each country will be responsible for the specific policy actions it chooses," the draft reads.

"The choice of which means to take to achieve these goals is now very much up to national parliaments," explained an EU diplomat, "but there will likely still be discussion by prime ministers on an annual basis to take stock of where we are."

Rescue fund flexibility

Countries also remain highly divided on adjustments to the zone's temporary bail-out fund and the structures of its permanent replacement that will take over its duties in 2013, as well as whether to ease the terms on which Ireland and Greece have borrowed money from bail-out funds.

The current €440 billion European Financial Stability Mechanism (EFSF) only has an effective lending capacity of some €250 billion, a sum that may be insufficient in the event of future calls on the fund for cash. These worries have increased the pressure to expand this effective lending capacity, but this can only be done by the eurozone's stronger economies, Germany in particular.

Peripheral states and the European Central Bank have called for more flexibility in how the rescue mechanisms operate, with suggestions that both the EFSF and its permanent replacement from 2013, the European Stability Mechanism, be allowed to buy bonds itself as the ECB is currently doing, or let its loans be used for governments to buy debt back on primary or secondary markets, allowing a less disruptive form of restructuring to take place. There is also a proposal that the EFSF and ESM provide credit lines to troubled countries.

Meanwhile Ireland and Greece are lobbying heavily to convince Germany and other core eurozone countries to permit a reduction in the interest rate paid on their loans or an extension to the payment period. The latest formulation that appears to be gaining some support would be that countries would get a refund on the punitive margin the European Commission tacks on above the cost of borrowing designed to make countries think twice before entering into the bail-out system.

However, it remains unclear whether Germany, backed by fellow euro-success-stories Finland, Austria and the Netherlands, will drop their opposition to boosting the lending capacity and allowing the rescue mechanisms greater flexibility.

Quid pro quo

In a last minute lobbying push, Ireland's new prime minister, Enda Kenny was meeting commission chief Jose Manuel Barroso on Thursday evening while Greece's George Papandreou at the same time was chatting with French President Nicolas Sarkozy and his finance minister Christine Lagarde.

Ms Merkel has been explicit in what the quid pro quo must be, according to unnamed German lawmakers speaking after the chancellor commented in a closed session. For any flexibility around rate cuts or payment extensions, Greece must run a mass privatisation drive. Currently government thinking is leaning towards a sell-off of the trains and even sticking a for sale sign on some of the country's archipelago of small islands. Ireland for its part must back a common eurozone corporate tax base.

On Thursday, Dublin appeared to be on the verge of cracking, with EU diplomats saying that they might agree to language mentioning an investigation of a common corporate tax base: "Most likely there will be some reference in a very limited way to co-ordinated tax base, saying something along the lines of 'It is something that will be looked at.'"

Meanwhile the Bundesbank and all three German coalition partners are flatly opposed to any increase in the scale of loan guarantees to the bail-out funds, and the country's state governments have now also begun to insist on giving their approval as well before any agreement is struck. However, the left argues that the chancellor is not actually facing any genuine pressure, as the opposition SPD is willing to back her in boosting the rescue mechanisms should she worry that the market-liberal Free Democrats vote against such plans.

But opposition is not only hardening in the EU's economic powerhouse. Traditional allies in the Netherlands remain steadfast in their rejection of any reduction in interest rates while in Finland electoral pressures are holding the hand of the government. The country is set for a general election on 17 April and support for the populists of the True Finns party have soared on the back of anti-bail-out rhetoric. Prime Minister Mari Kiviniemi said last Thursday that she is willing to form a coalition with the party.

The stalemate and squabbling at the heart of eurozone negotiations meanwhile has caused peripheral eurozone borrowing costs to soar as investors assume that little advance will be made at Friday's summit.

Borrowing costs on Wednesday for ten-year Portuguese government debt climbed to 7.63 percent, 9.58 percent for Ireland, 12.9 percent for Greece and 5.51 percent for Spain.

Whether the shocking rates sharpen minds and break the paralysis remains to be seen.

One EU diplomat on Thursday predicted what will happen at the summit: "Most likely, prime ministers could record some sort of progress toward a comprehensive deal and give guidance to finance ministers on Monday."

European finance ministers are set to meet in Brussels at the start of next week, where the haggling is set to continue.