Cause and Effect in European Politics and Law

The European Parliament Approved the Reform of the EU Economic Governance

Ralitsa Kovacheva, Desislava Dimitrova, September 29, 2011

Imagine a school with a class of 27 pupils, a class master, a principal and a school board. This is the European Union with its 27 Member States, the European Commission (the class master), the Council of Ministers (the principal) and the Parliament (the board). Although this analogy is not literal in terms of subordination, it aims rather to show the need for coordination of the processes and mechanisms of decision-making. Because the goal is to achieve a high average grade of the entire class and reduce the gap between the best and worst performers. To that end, there should be uniform rules for all, the same controls, same evaluation criteria, moreover - consistent with everybody’s capabilities and in the same time with the ultimate objective – a high average grade.

That is exactly what the reform of EU's economic governance is aiming. Probably, if there was no financial crisis that has grown into a debt crisis of the euro area this reform would have happened sometime in the future. However, the events in recent years have forced the EU to take urgent measures for better coordination of economic and financial policies of its Member States. While we often criticise Europe for its sluggishness and belated decisions, we must realise that the reform of the economic governance was proposed by the Commission and approved by the Parliament and the Council in one year only.

Moreover, this is about really fundamental changes in terms of granting more rights to the European institutions to supervise national policies, delegating more powers to Brussels to monitor, recommend and sanction when the rules are broken. Because, again, by analogy with school, discipline is an integral part of the learning process. One cannot sleep in class or be absent, whilst expecting high grades - something that was possible in the EU so far.

Last spring all this has materialised into concrete ideas of the European Commission and in September - into the legislative package aimed at strengthening the economic governance. It has become popular as the Six-pack because it consists of 6 parts - four proposals are aimed at strengthening the Stability and Growth Pact and budgetary surveillance, while the other two focus on monitoring and controlling macroeconomic imbalances. On 28 September the European Parliament has finally approved the new pieces of legislation after lengthy negotiations with the Council that ended with an agreement two weeks ago. Over the past year and a half euinside wrote on the topic repeatedly and explained the new rules in details. We organised public discussions in Sofia and Brussels to enable EU citizens to understand in time what happens when the legislation comes into force.

In fact, with the proposed new instruments and improved old ones the EU is trying to reach the roots of the current crisis by addressing the two main reasons - irresponsible spending by the states and macroeconomic imbalances. The clearest example of the former is Greece, which is threatened by a default, because the state used to spend for years much more than it produced, financing the deficit with debt. But this debt is now so large and expensive that it is unbearable and the country had to be rescued by its European partners (as well as Ireland and Portugal).

In order to prevent the Greek case from happening again, the new legislation strengthens the Stability and Growth Pact by shifting its focus on debt, earlier application of sanctions and giving more rights to the European Commission (its decisions on sanctions to be considered enforced unless rejected by the Council by a qualified majority). Moreover, the so-called reversed majority rule will be applied yet at the earlier stage of warning made by the European Commission to the Member States. This was one of the most contentious points in the negotiations between the EP and the Council because it meant for the Member States to lose the opportunity to influence politically on the decisions.

The European semester, which is already operational, was also put into the law framework of the economic governance. The European semester is an early review of the budgets and programme documents of the Member States by the European Commission and partners in the Council before these are voted on by national parliaments. Other innovations in the economic governance package are the common budget standards for all countries, ensuring greater independence of the statistical authorities and the imposition of a fine for falsified data.

Macroeconomic imbalances are an entirely new area of activity of the European institutions. As we saw, the common currency cannot function when there are significant differences in the economic situations and policies of the member states, so common surveillance had to be introduced of various macroeconomic indicators, as house prices, export trends, public and private debt developments. In some countries like Ireland and Spain, for example, the problems came after the burst of the housing bubble which clearly showed the need to monitor if potential bubbles are forming and to respond promptly.

In addition, countries like Germany, for example, have large trade surpluses while others, such as Greece or Portugal, have large deficits. This, along with differences in productivity leads to significant differences in competitiveness. Therefore, the EP insisted for the so called symmetry - to monitor as countries with deficits, so those with surpluses. The new Member States, in turn, won the catching up effect to be taken into account, applying upper and lower thresholds of the indicators, instead of an average European value. "It is essential for the proper interpretation of the indicators their critical levels to be different for the euro area countries and those outside," Bulgarian MEP from the EPP/GERB Iliana Ivanova commented.

Although the European Parliament supported in general the new legislation, it is not uniform in its opinion on the package. MEPs from the left side believe that a too strong emphasis on budgetary discipline and sanctions will prevent Member States from investing in economic growth and employment. Their colleagues from the right are convinced that budgetary consolidation is an inevitable first step and important part of regaining market confidence, especially for the euro area. These differences became again evident at the press conference of the six parliamentary rapporteurs on the package.

Carl Haglund (ALDE, Finland), who was EP rapporteur on prevention and correction of macroeconomic imbalances in the euro area, said: "Sound public finances won the vote in the plenary." His colleague from the Group of the Socialists and Democrats Elisa Ferreira (Portugal), EP rapporteur on macroeconomic imbalances in the EU, was not so enthusiastic. She explained that the Socialists didn't share the enthusiasm of many of their colleagues, because the package was unbalanced "as wonky table lacking one leg". What was missing were the incentives for growth and jobs, Ms Ferreira noted.

Expectedly, especially satisfied were the representatives of the EPP Group Corien Wortmann-Kool (the Netherlands), rapporteur on strengthening coordination of economic and fiscal policies, and Diogo Feio (Portugal), rapporteur on implementation of the excessive deficit procedure. Although their reports were adopted with the thinnest majority because of the opposition from left parties, both MEPs stressed that the reform was a solid foundation of the economic governance and a strong signal of confidence to the markets.

The rapporteur on budget standards, Ms Vicky Ford (ECR, UK) recalled that except the euro area, there were ten more EU Member States where it was also important to have much stronger budgetary processes and much stronger transparency of how public money were spent.

Sylvie Goulard (ALDE, France), rapporteur on budgetary surveillance in the eurozone, commented that the great merit of the new legislation is to achieve a more transparent and democratic process of decision making: "We have built bridges between institutions which didn`t talk." She didn't miss the opportunity to mention the Eurobonds, suggested in her report. During the negotiations on the package, under pressure from the Parliament, the Commission has engaged to present options for the introduction of Eurobonds which is expected to happen in the coming weeks.

Provoked by the journalist's question MEPs said that the new legislation didn't bereave national parliaments in the eurozone of their right to be the last budget authority. On the contrary, the European Parliament did much to strengthen national ownership, Corien Wortmann-Kool said, stressing that it could not be allowed to violate the Treaties, approved by those same parliaments. All deputies commented that the sovereignty in terms of economic and fiscal policies couldn't be placed in the first place by the Member States, because "markets do not respect sovereignty," as Chairman of the parliamentary economic committee Sharon Bowles (ALDE, UK) noted. According to Elisa Ferreira, "the European process includes letting go a lot of sovereignty in exchange for a lot of solidarity."

A similar discussion took place a day earlier between the MEPs and the Eurogroup President and Prime Minister of Luxembourg, Jean-Claude Juncker. The lawmakers were particularly critical of the proposal of France and Germany to create a eurozone government, led by European Council President Herman Van Rompuy. The Liberals and the Greens again urged the governance of the eurozone to be entrusted to the European Commission. In response, Mr Juncker explained that the Commission had no executive rights but only to propose and it could not become a body of economic governance under the current legislation. "I am more then willing talking about strengthening powers of the Commission [...], I'm a big fan of the Commission. However, don’t imagine for a moment that the governments would be willing to relinquish any power in managing the eurozone," Jean-Claude Juncker heatedly said.

Actually, the fight for predominance in the decision-making process delayed the negotiations on the Six-pack for three months, while the Parliament eventually got the role which it insisted upon. But these contradictions between the European and national levels in the search for balance between national and community interests will hardly end with the adoption of new pieces of legislation. Rather, they will burn even more strongly when implementation starts. On how it will happen, Sylvie Goulard was most eloquent: "Even God giving the rules to Moses on the Sinai has never been sure that they would be implemented."

In a previous version of this article we have wrongly referred to Mr Haglund as being an MEP from Sweden instead of Finland.