Institutional Affairs

  • The new framework constructs unprecedented new intervention in national budget and economic decisions (Photo: EU Commission)

EU ushers in 'silent revolution' in control of national economic policies

16.03.11 @ 10:27

  1. By Leigh Phillips

After months of often bitter back-room negotiations, European finance ministers have finally given the green light to a radical new centralised EU oversight of national budgeting processes and, broader still, of all economic policies - both of countries that use the single currency and those that do not.

The unprecedented shift in powers to the bloc from member-state parliaments, heavily limiting what is known in the jargon as "policy space", or the ability of countries to write their own laws, was saluted by EU economics chief Olli Rehn.

"Today the EU member states are endorsing the basic thrust of the six legislative proposals by the commission," he told reporters after ministers had given their approval to what European decision-makers have dubbed the 'Six Pack'.

The ministers were not endorsing a light work-out of economic sit-ups, but a different sort of regime entirely - a half dozen new far-reaching laws that the commissioner said "will lead to a quantum leap of economic surveillance in Europe."

Although much of the often very technical discussion, aimed at convincing markets of Europe's commitment to tighter fiscal decision-making, has been buried in the back of the financial pages of newspapers, those at the heart of the EU are under no illusion about the profound transformation the bloc is about to undergo.

"What is going on is a silent revolution - a silent revolution in terms of stronger economic governance by small steps," commission President Jose Manuel Barroso said last June after the EU Council first gave the nod to the commission's initial concepts for that would later evolve into the Six Pack.

"The member states have accepted - and I hope they understood it exactly – but they have accepted very important powers of the European institutions regarding surveillance, and a much stricter control of the public finances," he said at the time.

Finance ministers on Tuesday (15 March) signed off on the draft laws - still yet to be embraced at the level of premiers and presidents and also awaiting the imprimatur of the European Parliament.

However, it was political agreement at the crucially important level of finance ministers for which observers, particularly in the markets, have long been waiting.

"This is of course a very important step indeed," said Rehn.

A very tight leash

The new rules focus on keeping in check two elements of national government spending: the first being annual government budgets and the second, under a more open-ended process but under just as tight a leash, all economic policies - and not just for one year, but over the longer term.

The first aspect involves a thoroughgoing reform of the eurozone's existing Stability and Growth Pact, first introduced in 1997, which required countries to limit their annual deficits to three percent of GDP and overall public debts to 60 percent of GDP.

The SGP has long come in for widespread market criticism for the looseness of its sanctions in the case of countries' failure to adhere to its strictures, particularly after some of the largest member states, France and Germany in 2005 managed to relax the rules.

Where previously the focus has tended to be on overweening deficits, with not as much targetting of ballooning debts, under the new rules, there is to be a much greater emphasis on keeping debts in check as well - even if the deficit is kept below the three-percent threshold. For countries with debts over 60 percent of GDP, they will now be expected to diminish this situation by five percent a year over a period of three years.

If countries are in the eurozone, this oversight is backed up by the imposition of stiff new sanctions. Scofflaw states will have to fork out cash amounting to 0.2 percent of GDP into a non-interest bearing deposit account. If a country does not correct its situation in line with the recommendations of the commission and Council, this cash will be snatched away as a fine. This process can be repeated up to a maximum of 0.5 percent of GDP.

To put the amount of money in perspective, for Spain, a country on the frontline of debt concerns, such a fine would amount to €5.25 billion. In Vigo, Galicia, a new hospital is currently being built for €315 million. A total of 16 such hospitals could be built, with change left over, for this same sum that could be grabbed by Brussels without recourse.

Under the old eurozone system, financial sanctions could only be applied if a majority in the Council approved of the move. Horse-trading over a variety of issues however ensured that this was never much of a threat.

The new strengthened SGP will now see sanctions imposed via a 'reversed majority' system, under which they will be automatically applied unless a majority in the Council vetoes the move.

This still gives too much leeway, argued the Benelux countries, who felt that there remains enough wiggle room to allow the big countries to get out of sanctions - essentially a fishing net that catches the EU minnows while letting the bigger fish get away.

According to Belgian finance minister Didier Reynders, speaking to reporters on Monday, the Benelux tried hard to press for more of what in euro-jargon is called automaticity', but in the end was very much isolated and such proposals were ultimately defeated.

"We hope that the European Parliament will be more successful [in amending the rules in this fashion]," he said, adding that the three powers were quite "angry" about this result.

The president of the ECB, Jean-Claude Trichet, also expressed his dissatisfaction, saying: "The improvement in governance that is presently envisaged is in our opinion insufficient."

All economic policies now under the microscope

Under the second major aspect of the new framework, the more open-ended surveillance - of every single one of a nation's economic policies and not just of annual budgets - imposes a similar set ‘corridors' of acceptable behaviour by member states to prevent what are labelled 'macroeconomic imbalances' over the longer term.

These imbalances may cover such issues as trade deficits, 'excessive' wages, levels of private and public debt, housing bubbles, the 'misallocation of resources' and 'unsustainable levels of consumption'.

But in theory, these imbalances could be anything.

This is because definite, quantifiable indicators - specifying precisely at which point and in which policy area a country has reached a macroeconomic imbalance - have yet to be written and, crucially, because the commission has argued that the importance of different imbalances varies over time.

So although a broad set of parameters is to be assessed using a 'scoreboard' of economic indicators, the details will only be defined on an ad-hoc basis after the commission and Council find that a member is guilty of this crime.

For eurozone members, being found guilty will once again result in fines, although in this case 0.1 percent of GDP annually.

Transparency campaigners have already raised a red card over this element of the package, worried that such surveillance, with its recommendations and fines having such profound influence over hundreds of millions of people's lives, will be almost impossible to track by citizens, journalists or civil society, as the monitors will be experts and lawyers in the commission and Council behind closed doors.

Italy did however win something of a watering down of the system, which would now allow low levels of private - as opposed to public - debt to be taken into account as well and used as a counterbalance in consideration of oversight and sanctions.

Germany meanwhile managed to force the commission to back down in its insistence that macroeconomic imbalances can also come from excessive trade surpluses.

Many economists sceptical of the EU's stringent market-liberal approach have argued that the root cause of Europe's crisis was eurozone policies that allowed Germany to gain a trade surplus at the expense of peripheral countries that use the single currency.

The commission's hesitant nod in this direction, included in the initial legislative proposals - saying that such trade imbalances also create instability - have now been neutered, with Berlin winning what is termed an 'asymmetric' treatment of trade surpluses.

This means that peripheral countries will be the ones that are more likely to be the focus of macroeconomic imbalances, and not Germany or its core-eurozone allies.

'Even China cannot decree such economic outcomes'

The Six Pack however is not without its trenchant critics.

Sony Kapoor, for one, the director of Re-Define, a Brussels-based economic-policy think-tank, warned that whatever the new rules hope to achieve, they do not tackle the root causes of the crisis.

"The truth is that the economic governance measures agreed would not have done much to thwart the financial and economic crisis that currently afflicts Europe," he said after the ministers reached agreement.

He pointed out that the new strictures could actually inhibit countries' ability to engage in emergency public spending as many did in the immediate months after the economic crisis hit, which prevented the downturn from turning into a full-throated depression. He is also critical of the leeway Germany won in its ability to rack up what some view as dangerous trade surpluses, arguing that this was what "lay at the heart of the ongoing economic crisis."

He compared the new oversight and sanction regime to the command-and-control economic policies Beijing attempts.

"The Council's approach of decreeing economic outcomes assumes levels of government control over economic outcomes that does not even exist in China, leave alone free-market European economies," he said.

UK extracts exception again

Diplomats from the UK have repeatedly issued statements over the last few months saying that even as the euro area moves forward with so deep a level of economic integration, how "very relaxed" they are, as London with its pound is supposed to sit aloof outside the eurozone and, under the new rules, is also not subject to the massive fines that are the whip within the powerful economic governance system.

But in an indication of how profound the changes are for all states, the country's emissaries have in recent weeks been fighting a quiet but often difficult fight to ensure that Britain be exempted from much of the new architecture.

One UK diplomat in a rare, private moment of frankness, referring to the obsession of British eurosceptics regarding supposed EU regulations outlawing bendy bananas and smoky-bacon flavoured crisps, recently joked with an advisor to the German finance ministry: "If the likes of Ukip and the Daily Express only knew what is on the table!"

The budgetary surveillance rules and one of the new laws within the Six Pack, establishing a "European fiscal framework", have been the focus of this rear-guard action, as they cover not just eurozone countries, but the whole of the EU.

Even without involving fines being applied to Britain, the budgetary oversight and fiscal framework rules, which affect decision-making on how much spending can increase, according to UK diplomats infringe on British sovereignty.

The UK already has an independent Office of Budget Responsibility, which is supposed to ensure domestically the same fiscal discipline as much of what the new EU rules hope to achieve across the bloc, so London says that in effect little would change even had they lost this battle, as the country is already largely in compliance. The matter is instead "a point of principle" according to one source.

"We don't agree with the EU setting our rules."

Under the EU Treaty, while other states must "avoid" excessive deficits, the UK has a dedicated protocol that notes that the country is only to "endeavour to avoid" such situations.

This all-important word - "endeavour" - was the source of British diplomats' victory.

Unlike many eurozone states that have fumed publicly over elements of the proposals, British lawyers and diplomats have without a sound worked tirelessly to convince the commission that as a result of the protocol and its decisive word "endeavour" they are exempt from the fiscal framework and budgetary oversight.

According to UK sources, via this one word, they had achieved their checkmate.

A UK government spokesman told EUobserver: "We got exactly what we wanted, a procedure that applies Europe's new budget rules, but don't bind the UK."

However, the situation for Denmark, also outside the eurozone, but with a history of similar opt-outs, is blurry, as was noted by a British House of Lords report on EU economic governance published late last year that predicted the battle.

Copenhagen, unlike London, apparently made no efforts to secure similar "special deals", according to a Danish diplomat.

Meanwhile, other non-eurozone members, including Sweden, Poland and much of the east, nevertheless remain, apart from the lack of fines, otherwise fully beholden to the new regime.

EU premiers and presidents and Strasbourg have yet to deliver their endorsement to the Six Pack, but barring unexpected revisions, Europe has changed utterly.