Brussels, 10/06/2014 (Agence Europe) - The 2009-2014 term of the European Parliament attempted to remedy failings in economic and monetary union (EMU) and strengthen budget discipline, believing that the roots of the economic crisis lay in countries' budget excesses.
Hoping to use the term of office of the next European Commission to consolidate economic recovery, a number of European political leaders discussed ways of building stronger foundations for what they call “the ship built in the midst of a storm” at the Brussels Economic Forum on Tuesday 10 June.
Former right-hand of Mario Draghi at the ECB and now working for the German Labour Ministry, Jörg Asmussen (of Germany) said “enlarging and deepening the EU at the same time had not worked” and “EMU is incomplete”. He said one of the first fronts to be worked on is “defining the relationship between the EU and the eurozone”. He added: “I think a two-speed Europe is already a reality” and for some countries at the moment it is neither desirable nor feasible to join the eurozone in the years to come. The most recent European Commission convergence report showed that only Lithuania is ready to join the single currency (see EUROPE 11094).
Asmussen suggested consolidating and developing the eurozone's rules and governance by incorporating into EU law the rules laid down in the two inter-governmental treaties. To this end, only very limited changes would be needed to the EU treaties. He noted that two lessons had to be learned from how the Ukrainian crisis was affecting the EU: a) a single energy market and common defence structures need to be set up on the ground; and b) the relationship between the EU and Ukraine and other neighbourhood nations like Georgia needed to be clarified.
Reza Moghadam, Director of the International Monetary Fund's European department, admitted that the current system of budget governance had emerged after long talks and tough compromises, and improvements were possible in three areas: “Simplify the rules while keeping some flexibility-make the public debt-to-GDP ratio the ultimate objective and reduce the number of operational targets. (…) Europe needs a governance framework that anchors debt sustainability so that it is less complex and easier to communicate than the current regime. (…) Debt dynamics, i.e., the evolution of the debt-GDP ratio, should be the single fiscal anchor, and a measure of the structural balance the single operational target. This would go a long way to simplifying the system while retaining flexibility against cyclical shocks”.
The IMF representative said: “The focus on nominal rather than structural targets, as well as weak enforcement, provided little incentive to build fiscal buffers. (…) More automaticity in enforcement could help: if sanctions cannot be avoided ex post, then they are likely to be more effective ex ante”. Moghadam commented: “There is a worry that the fiscal framework actively discourages public investment, which is already too low in Europe. (…) How to deal with this? Removing public investment from any fiscal balance calculations is undesirable in my view, as it encourages 'creative accounting' and weakens the link between debt-to-GDP and operational targets”.
Euro Commissioner Olli Rehn added a few nuances to Moghadam's ideas saying there was “plenty of room for simplifying and streamlining the rules, although if you simplify exclusively, it becomes difficult to make them quite pro-cyclical. The more you take into account the economic cycle, the more complex the rules tend to be”. Rehn did not seem to support the idea mooted by Germany of having a European commissioner with the power to reject a country's planned budget. In an interview with this newsletter, Rehn said that the Commission, along with the Council of Ministers, already had great powers in this domain (see EUROPE 11090).
Portuguese Finance Minister Maria Luis Albuquerque said that the rules had been ignored and it had taken a severe crisis for anyone to realise this. She called for coordinated responses, pointing out: “We cannot rely too much on the financial markets” and, although they are currently in a forgiving mood, one must not think the crisis is over simply because the markets are in a good mood. (EL)