28th May 2022

EU economic task force reconvenes as disquiet returns to markets

  • Van Rompuy and Merkel: The German chancellor wants tough sanctions and the president wants economic harmonisation (Photo: Council)

As EU Council President Herman Van Rompuy's economic governance task force reconvenes on Monday (6 September), the fiscal situation of many in the bloc remains parlous.

Concerns of a double-dip recession echo across the Atlantic, and bond yields for the EU's more troubled countries stubbornly keep rising as if the promise made in May of a €750-billion eurozone bail-out should things go truly wrong had never been made.

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Having first met toward the end of May and a further two times before the summer recess, the task-force set itself four goals under the rubric of "stronger economic cohesion of the union" - a phrase that from the beginning produced conflicting interpretations from London, France and Berlin.

Beyond the construction of new crisis-response mechanisms - some of which are now already being imposed - the task force is also to come up with proposals for strengthening economic governance, to give teeth to EU rules on budget discipline that have historically been flouted with impunity and, finally, a way to reduce the divergences in competitiveness.

While in principle all member states back the idea of tougher discipline for countries that break any new rules put in place, there are wide divergences as to what form such sanctions should take. Germany backs the idea of a suspension of voting rights in the Council.

This is an unpopular position as it would likely require treaty change, although Finland appears to have signed up to the idea.

"Finland and Germany will negotiate very hard in the Van Rompuy group (to ensure) that sanctions are imposed not after the three percent limit has been exceeded for a long time, but that we learn from history and act quickly and decisively," German chancellor Angela Merkel told reporters after speaking to Prime Minister Mari Kiviniemi last week.

Meanwhile, the lesser sanctions being mooted, such as a restriction on structural funds, are raising hackles in the eastern, poorer states, who receive the bulk of such monies. The wealthier West would be less likely to be hurt by such a penalty, as they do not receive as much from these sources, and Poland and other newer member states have in the last few weeks given notice that this is a red line for them.

Other proposals have also provoked much debate. EU leaders have backed plans to submit budget outlines to Brussels, but drew the line at handing over the full draft budget to the EU commission for approval before national parliaments have had their say.

Finally, and perhaps most controversially, Mr Van Rompuy's wish to reduce divergences in competitiveness is likely to hit the biggest hurdles as this points towards a harmonisation of taxation, social spending and labour laws.

But such big concepts may have to be put on the back burner even before they begin to provoke controversy as leaders return to a reality not indistinct from the height of the sovereign debt crisis that shook the union in the spring.

Although Greece has been guaranteed a €110-billion lifeline and the rest of the eurozone €750 billion, bond yields continue to be exacting, with investors looking for nine percentage points more in interest to buy Greek issuances than for their German equivalent, similar to the situation Athens found itself in a few months ago, while Ireland is up 3.5 percent on German bonds.

This comes as eurozone governments look to raise some €80 billion from capital markets this month, twice what they had looked to do in August. Some analysts fear they may have difficulties raising the cash.

The shift of private debt from the banks to the state has left many in a grim situation. Dublin in particular faces the black hole of debt that is the nationalised Anglo Irish Bank. If the commercial property market continues to suffer, the bank could require as much as €35 billion, a likelihood that has resulting in Ireland's credit rating to be ratcheted downward.

Finally the big unknown is how citizens will react. Already the austerity measures imposed on the so-called PIIGS economies has provoked widespread opposition, and, in Greece, civil unrest.

On 29 September, when European economics commissioner Olli Rehn is scheduled to unveil the EU executives own proposals for sanctions parallel to those being discussed by Mr Van Rompuy's task force, trade unions across the bloc will hold an pan-European 'day of action' against austerity, with general strikes already announced in a number of states.

Investors, national parliaments and EU citizens will all be keeping an eye on how the taskforce, the commission and finance ministers navigate these waters.

President Van Rompuy is to deliver a preliminary task force report next Thursday as premiers and presidents meet in Brussels

Following this, he will try to achieve agreement on an economic governance package with concrete proposals ahead of an official submission to be delivered ahead of the regular autumn summit.

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