The "Common Standards" of Pedro Solbes. The European Commission has taken a first step in the mandate given to it at the Barcelona Summit. This consists of presenting the Council with "proposals for improving the co-ordination of economic policies" within a reasonable time before Spring 2003 (in practice before the end of this year). The objective explicitly explained by government leaders is to strengthen the co-ordination mechanisms for budgetary policies in Euro-zone countries by assessing their compatibility with Union monetary policy. Commissioner Solbes has written to Finance Ministers in Member States calling on them to examine the "common standards" the Commission seeks to set out for economic and budgetary policies in Member States (see the summary of this letter in our 15-16 April bulletin, pp 12-13). Ministers have been asked to discuss them at a more broadened EUROGROUP meeting in Brussels on 7 May (this includes countries that do no yet belong to the Euro-zone). Scrutiny of the two aspects of EMU - monetary and economic has thus been launched at an institutional level.
The Convention will deal with it. The letter from Mr Solbes refers to something that could distinctly be considered in the short-term as a possible amendment of EMU rules, Treaty reform, and which will initially be discussed at the Convention on the Future of Europe. The "Confrontations" Association led by European Parliamentarian, Philippe Herzog has been concerned by this issue for some time and will be organising a seminar on "Reform of the Economic Union in the Convention," open to actors from civil society and which will kick off on 30 May in Brussels. Participants will include European Commissioner, Michel Barnier and General Secretary of the European Trade Union Federation, Emilio Gabaglio. Mr Herzog has already taken stock of the "convention proposals" (to which I will return), which include a chapter on the "organisation of a real economic and social Union". He is requesting a "significant but not detailed re-writing" of the current document.
Jacques Delors, the trail blazer. The Herzog document figures among the declarations and positions of the re-harmonising phase of EMU that the European Commission has just launched. Several contributors have taken up the notion of "economic government of Europe". Jacques Delors, whose trail-blazing role in denouncing the lack of balance between the monetary and economic aspects of EMU is well known, does not like the description "economic government", which is in his opinion often misunderstood and provocative. He does, however, believe that the current situation is totally unsatisfactory. As far back as December, he declared (to Baudoin Bollaert in an interview in the "Figaro"), "We have a monetary pillar that is institutionally well-structured and which works, and an economic side that is anaemic. We have a jolly time with EUROGROUP, who tell us stories from their Fairyland library, EUROGROUP here and EUROGROUP there. But it is under-performing. It doesn't have the sufficient means, and the will of its members does not shine through in a way that can really co-ordinate their macro-economic policies… In EUROGROUP, Ministers can talk to each other, take decisions and avoid asymmetrical shocks but they don't have the powers of financial or budgetary decision-making of their own. This must go through the Member States". More recently Jacques Delors outlined two solutions: develop the "strengthened co-operation" in EMU, with the institutional tools to act or consolidate EUROGROUP and make it Community based (it is currently intergovernmental with the Commission invited to sit in on its work). Mr Delors points out that "strengthened co-operation" would enable Euro-zone members to create a cyclical regulation fund that would allow it to resist external shocks. His perspective of economic policy co-ordination is very ambitious. In the interview already mentioned he said, "The question of whether 2.8% or 3% is allowed for budgetary deficit is secondary. The real problem is the overall economic policy, which, of course, includes currency, taxation, the budget, social security but also employment policy, education, research, innovation, urban planning." This does not mean that all these factors should figure in common policy or Community decisions. (On other occasions, Mr Delors clearly illustrates that social security and education policy had to remain "national") but that, "all that must be arranged coherently if we want Europe to constitute an exemplary zone from a sustainable development and social progress point of view". And he hadn't forgotten the need for permanent contacts between the President of the European Central Bank and EUROGROUP, stating, "If Finance Ministers were reasonable, they would give this role to the President of the Commission, which is there every day and would, of course, act within the framework of the guidelines laid down by EUROGROUP".
Should EMU speak with one voice? Jacques Delors' proposals are located in the long-term rather than in the measures that according to the Commission, could be taken from Spring 2003 and which involve the application and interpretation of the Maastrich Treaty provisions and Stability Pact, without amendments to the original text. Mr Solbes has already presented some significant operational suggestions to the institutional aspect regarding Union representation in international organisations, such as the IMF (see our bulletin already mentioned on page 16). The EU could be expected to have a "single seat" in this respect and speak with one voice on the European line and the "Community Method". Ministers did not give the impression at Oviedo that they were very keen on this initiative, which was defined by some as premature and which would not be received very warmly by the ECB at all…All this will become clearer at the formal enlarged EUROGROUP session at the beginning of next month.
The Cernobbio guidelines. For those concerned, there is another debate going on that involves the possible revision of the Stability Pact. The European Commission is of the opinion that this is not up for discussion as it represents the very foundation of European stability and growth policy and it's not to be touched. We're talking about it all the same. A profound debate occurred last month at the regular "Ambrossetti Workshop" in Cernobbio, Italy. Participants included Hans Werner Sinn, President of the IFO (Munich, Germany), Paul Volcker, former President of the Federal Reserve (USA), Jean-Paul Fitoussi, President of the Observatoire français des Conjonctures économiques, and European Commissioner, Mario Monti. Most economists attending supported more flexibility in the Stability Pact by introducing a distinction between structural deficit and conjunctural deficit. The former would be made more rigorous and set at 2% (instead of the current 3%), the latter would be linked to conjunctural development and treated with greater flexibility (Mr Sin considers that this flexibility should not apply to countries where the level of public debt is too high). Mr Fitoussi was of the opinion that public investments must at least be excluded from the calculation of the deficit (stressed by Jacques Delors in the past) to avoid selfish behaviour that could endebt future generations, who would benefit from this measure but that this should be clearly and firmly defined. Other economists thought that the deficit should not be calculated on an annual basis but over a longer period, five years for example, in order to make the system more supple and adaptable. The different contributors at the debate did, nevertheless, stress the advantages gained by Member States and which are sometimes forgotten. Mr Sin pointed out that the balancing of the books in Italy's public sector was essentially due to a reduction in interest rates (13% in 1995, less than 5% today) made possible by the introduction of the Euro. This German economist calculated that if Italy had not participated in the Euro, its budget deficit would not be at its current rate of 1.2% but at 8.2% of GDP.
Mr Monti pointed out that the different factors alluded to had already been discussed in detail at the Commission during the elaboration of the Stability Pact and in light of Jacques Delors' White Paper considerations. It's therefore not something that economists have just discovered. In his letter to Finance Ministers, Commissioner Solbes recognises that in exceptional circumstances a budget deficit can exceed 3% of GDP without any modification to Stability Pact rules being needed.
A vital debate. In this context, what happens in the present is being discussed in the calendar for Member States returning to balanced budgets. The Commission thinks that the 2004 deadlines are still valid and insists that commitments be respected (not only those in the Stability Pact but also those stemming from the main economic policy guidelines in the annual stability programmes of Euro-zone countries. It is obvious that it does not want to encourage a facility for negligence that could court disaster. But at the same time, there are worries in certain Member States, stirred up by looming elections. There is also an additional element of great significance that has been added to the EMU debates, that of maintaining and re-launching industrial activity in Europe, as opposed to certain trends, true or fictitious, that would allow for a partial slide of the European industrial economy into a services-based economy, primarily financial. To oversimplify, the "industrial" trend would be guided by German industrial culture, the "financial services" by the Anglo-Saxon economic culture. It's a vital debate that is already making waves and to which I will return tomorrow. (F.R.)