Cause and Effect in European Politics and Law

European Semester 3: There's no North-South Division

Adelina Marini, January 30, 2013

The European Semester is entering its third year after it was created with the aim to overcome the economic crisis in the EU, caused by the too national economic policies of the member states against the backdrop of the scale of economic interconnectedness. And if in the beginning (2011) the member states had to fight in panic huge debts and budget deficits, in the beginning of 2013 the main refrain is high unemployment and the weak economic growth. The semester is launched in the end of each year with the Annual Growth Survey (AGS) of the European Commission, which includes reports on macroeconomic imbalances, employment and the implementation of the ten-year economic strategy Europe 2020 as well. One of the key phases of the European Semester is the inter-parliamentary dialogue in which national parliamentarians and members of the European Parliament discuss major elements of the semester with the relevant commissioners - of employment and social affairs, and of economic and monetary affairs.

2013 will be the year of cautious optimism

In November 2012, the Commission has outlined five major priorities for work in the course of Semester 2013: pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the economy; seeking policies that stimulate growth and competitiveness; tackling unemployment and the social consequences of the crisis; modernising public administration. The context of AGS is the light of the tunnel of the crisis of which there is temptation to suggest that it is the end of the tunnel, but it is not out of the question, if the tempo of reforms and fiscal consolidation is abolished, to emerge that the light belongs to a rapidly approaching train.

In 2012 the economic environment in the EU was fragile. For the whole year GDP shrank by 0.3% in the EU and 0.4% in the euro area. Unemployment has increased drastically and the outlook is not good either, but the trend is positive, is the assessment of the Commission. There is progress in the consolidation of public finances, the tension on the financial markets is falling and, most of all, the countries that participated in deep reforms already show signs of recovery - indebtedness is dropping in a number of countries and export is growing in some member states which had large trade deficits.

Growth-friendly fiscal consolidation

As a result of the crisis, only in a few years the ratio of debt to gross domestic product has abruptly jumped from 60% to 90% on average in the eurozone. The government deficits in the zone of the single currency are expected to drop from an average of 6% of GDP in 2010 to 3 per cent in 2012 (the final data for 2012 are not available yet). It is expected this year the public debt to reach new heights of 94.5% in the euro area and in 2014, after which to begin to subside. Taking into account the differences in every country, the Commission recommends some general guidelines:
- investments in education, R&D, energy;
- increasing retirement age to fit life expectancy, restricting access to early retirement. Reforms of health care systems;
- reduce tax burden on labour in the countries where it is relatively high and hampers jobs creation;
- broadening tax bases rather then increasing tax rates or creating new taxes. It is also recommended all tax exemptions - reduced VAT rates or exemptions on excise duties to be reduced or eliminated.

Restoring lending to the economy

According to the Commission, the member states can do more to diversify the sources of funding thus increasing liquidity and reducing the traditional dependence of companies on banking financing. Some of the options the EU executive proposes are:
- promoting new sources of capital like, for instance, business-to-business lending; issuing corporate bonds; facilitating access to venture capital funds;
- reducing payment delays by the public administration which created a huge problem for the small and medium-sized economies. Recently the EU introduced a directive on late payments which has to be transposed by March this year into national legislation and which will reduce late payments to 30 days;
- ensuring a balanced approach to foreclosures by protecting vulnerable households via individual changes in mortgage conditions, thus avoiding a foreclosure;
- funding via the EIB;
- using the new instrument project bonds.

Policies that promote growth

Every country decides on its own how exactly to boost economic growth, but the Commission recommends investments (public and private) in innovation, new technologies, R&D. Raising performance of educational and training systems to allow closer binding to labour market needs. Improving business-environment, relieving administrative formalities for starting business, especially in the area of construction, business services, logistics, tourism and wholesale, is another recommendation by the Commission.

Tackling unemployment

In the past months, the number of unemployed has risen by 2 million people and has reached over 25 million in the EU. Their share in the EU is 10.6% and in the eurozone 11.6 per cent. The problem, however, is, as EU Employment Commissioner Laszlo Andor explained, that unemployment is turning into structural. Now one in two jobless is without work for more than a year, as the situation varies across Europe. The level of unemployment varies dramatically - from 5% to above 25%. The most affected are young people whose share in some countries is 50% of the unemployed. Among the measures the Commission proposes to tackle these problems are:
- limiting tax burden on labour, especially for low-skilled labour. Temporary reduction of social contributions or introduction of subsidies for hiring new workers, especially long-term unemployed or low-skilled;
- continuing reforms in the labour market by simplifying labour legislation and developing flexible working hours;
- reducing the number of early school leavers and facilitating transition from school to work through development of traineeships;
- introducing "youth guarantee" that would ensure work or continuation of education for all under 25 years of age. These schemes can be financed by the European Social Fund;
- encouraging trans border labour mobility.

Modernising public administration

The shrinking of public finances created new opportunities for modernisation of public administrations, the Commission believes. The data it reveals are very telling - public spending in the EU is almost 50% of EU's GDP, while the public sector has a 17% share of employment. Additional optimisation is recommended of public administrations, transition to digitalisation and digital interoperability among public administrations, trans border interoperability of online services. A very important element of the improvement of public administrations, according to the Commission, is improving quality, independence and efficiency of the judiciary because this will reduce costs for businesses and will increase the attractiveness for foreign investors.

The European Semester and the democratic legitimacy

The phrase 'democratic legitimacy' nowadays can be met in every context across the European speech and it was very actively present in the three-hour long debate between national parliamentarians, members of the European Parliament and the Commission. Yet when opening the inter-parliamentary session, Othmar Karas, vice president of the European Parliament, said that national parliaments should get more competences and more influence compared to national governments, while the European Parliament should get more influence on EU level. Democratic legitimacy should be ensured for the changes that are happening in the EU at the moment. Intergovernmental agreements are agreed behind closed doors and no one knows who makes the decisions, he said.

An option to solve the problem with the deficit of democratic legitimacy, according to a parliamentary representative of Malta, is to create democratic capacity to be included in the European Semester. Every parliament, no matter how big or small, should participate in building that capacity which will deal with the issues in the European Semester. A member of France's national assembly, however, doubted to what extent such inter-parliamentary sessions are in fact an expression of democratic legitimacy. Is this a catalogue of good intentions or is it an alibi, he asked and proposed to separate the sessions that affect the problems of the eurozone and those that are more general for the EU. Besides, the agenda for the sessions should not be transmitted up-down, but should come the from the bottom-up. Before the next meeting, a working group should be established to prepare the topics.

A member of the House of Representatives of the Dutch parliament informed that they have appointed a special rapporteur on the European Semester which, he said, was a rarity. But in order for the countries to implement the tasks they are given, national assemblies should have access to information. Most documents, prepared by the Council, should be made public and be provided to national parliaments.

As part of the conversation about democratic legitimacy, but without mentioning it explicitly, a German member of parliament called national specifics to be taken into account and even the political situation in the member states. Sometimes, at a national level, the demands of the coalition partners must be taken into account. The Commission cannot demand from Germany to abolish the monthly payment for raising a child at home, which is by law, because this is in the framework of national policy, she said. And a Greek MP added that it was important these inter-parliamentary meetings to be attended by representatives of the civil society as well.

A deputy from Finland said that no conference can ensure democratic legitimacy on the basis of the new Article 13 of the fiscal compact which envisages national parliaments together with the European Parliament to define the organisation and promotion of a conference of representatives of the relevant European Parliament committees and national parliamentary committees to discuss budgetary policies or other issues covered by the compact. She also called for the creation of a European forum to debate on tax evasion in the EU.

Too much austerity kills

Another large group of calls by national deputies was related to the austerity measures, unemployment and growth. In that regard, some joy in the session brought again the Maltese parliamentarian who called the European directive on working hours not to be applied blindly because Malta, for instance, is a small country where people want to work more, but they do not waste too much time travelling to work, so they can afford more free time. Another member of France's national parliament touched a painful spot for many countries that are going through tough reforms - spending cuts. Too much austerity is dangerous for societies and global economy, she said.

A British member of the House of Lords asked how exactly economic policies can be coordinated since, for instance, youth unemployment in The Netherlands is only 9.7%, while in some southern states it reaches 50 per cent. Another representative of the Dutch parliament spoke in detail about a two-speed Europe, calling not to allow cherry picking of measures that we like on European level. Europe has a problem with its reputation in the world. The EU is perceived as a source of spending, that it is a structure that interferes in the domestic affairs of others. We have to send a message that Europe is something more than the single market and that it is not the problem but the solution.

A deputy from Greece criticised Olli Rehn for claiming in his introductory remarks that Greece's competitiveness is improving. The results are better not because competitiveness is improving but because wages are falling, he said. A national representative from Cyprus called to work more on the roots of the problems rather than treating the symptoms. An Austrian MP said he was very concerned with high unemployment, saying that consolidation is a policy which is applied at any cost.

Olli Rehn, the EU Commissioner responsible for monetary affairs, responded to most of the raised issues saying that fiscal consolidation was important no matter of the findings of Olivier Blanchard, chief economist of the IMF, in whose recent report he admitted that the austerity measures suppress growth. Olli Rehn, however, appealed to pay attention to Mr Blanchard's warning against interpreting his findings as a call the consolidation measures to be ceased. These measures are a matter of confidence, Mr Rehn added and gave the example of Italy. In the summer of 2011, Italy committed to fiscal consolidation to allow the ECB to interfere on the secondary markets. Initially, Italy complied, the ECB completed the operation and things started to improve. But then, Premier Berlusconi decided to stop sticking to his commitments and this is how it came to the technocratic government of Mario Monti, Olli Rehn recalled, underscoring that this is a clear example of the confidence effect.

He started his responses, though, with Britain, using the occasion to address the British Prime Minister David Cameron, who promised a referendum on Britain's EU membership if before that he renegotiated the conditions of membership. I accept many of the criticism in terms of the internal market and red tape, but you don't need threats to demand changes of EU policies, the Commissioner said. As a passionate football fan and himself a former football player, Olli Rehn again used football metaphors to say that if he was in the shoes of the United Kingdom he would have wanted it to be a midfield player rather than sitting on the side benches. Goals cannot be scored from the benches, he added in his usual style.

In the end, he concluded that for the first time in a while he did not witness the traditional in the past years division between the North and the South. "And I thank you for that", he said, because this is a simplistic and even a caricature approach. There is no silver bullet for solving the crisis. It does not happen with fiscal consolidation only, neither with mutualisation only. We need to pro-actively build bridges between the two cultures - of the North and the South - and to build a stable union with increased responsibility and solidarity, the Commissioner concluded.