19th Oct 2021

EU officials flesh out 'reform contracts' plan

  • EU commission HQ: the German idea is likely to be a hard sell (Photo: tpholland)

EU officials are in the process of putting flesh on the bones of a German idea of "reform contracts," but it is going to be difficult to sell.

It builds on the premise that for all the efforts the EU has made to shore up economic and monetary union since the start of the financial crisis, the beefed-up rules are still more corrective than preventive.

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The thinking is that a half-way house system is needed. One that would get member states to reform before they get to the stage of being punished - be it for macroeconomic imbalances, or excessive deficits.

"What we have done until now is to create layers of surveillance and belt-tightening on member states," said one EU official with knowledge of the process.

"The whole idea of contractual arrangement is slightly different. We are trying to figure out how we can get commitments from member states before they enter into a 'red zone'," the contact added.

This is because punishing countries not adhering to the euro rules (the ultimate sanction is a fine) when they are already economically badly off is politically a no-goer.

The second problem with the current system of country specific recommendations is that they are largely ignored by member states.

Jorg Asmussen, German member of the European Central Bank's board, recently suggested that just one-tenth of last year's recommendations had been respected.

So the commission may flag up a potential problem a year or two in advance but it is a rare government that will tackle an unpopular issue before it has to.

The nub of the problem is about enticing politicians to make structural reforms which might get them turfed out of office at the next election and whose potentially positive effects would only be felt some years down the line.

Take a country such as Belgium for example. It is one of the very few countries in the EU that has automatic wage indexation, linking pay to inflation.

Mid-last year the European Commission cited the policy as one of the reasons for Belgium's "worrisome" competitiveness.

The criticism caused a political storm in the country as well as attracting complaints about who exactly is Olli Rehn, the economics commissioner, to be telling a country what to do.

All countries need structural reform now or later, say EU officials. What Germany, with its ageing population, will have to do down the line "will probably be bigger than what France has to do now," said the official.

So for the contracts idea to work, believe EU officials, the country must itself draw up a plan of action to tackle a - normally highly politically sensitive - structural issue and then get some sort of reward.

The plan could then be implemented with the commission.

What this reward could look like - a loan at below market rates - and how it would be financed (such as from the Eurozone bailout fund or the EU budget) have not yet been figured out.

EU leaders have committed themselves to agreeing the main features and the solidarity mechanisms of the system by the end of the year.

First discussion on the matter are due next week.

As with many hard-to-agree problems, it is being linked to another issue.

Progress on banking union - setting up a common way of winding down banks, an issue on which Berlin has been dragging its feet - is being linked with agreement on the contracts idea.

Berlin is keen to have progress on the contracts idea so it is set to move on banking union.

However the timetable is tight. No agreement on a bank resolution mechanism in December would likely mean that it will not get through EU parliament before it breaks up for EU elections.

And banking union is seen as essential to the future stability of the single currency.

Germany gets its way on reform 'contracts'

Germany says fellow EU leaders have "accepted the principle" of binding reform contracts that will transfer further sovereignty from national level to Brussels.

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