Reinforcing Economic Policy Coordination

The European Commission’s proposals are laid out here.

Summary:

Reinforcing compliance with the Stability and Growth Pact and deeper fiscal policy coordination

Reinforcing the preventive dimension of budgetary surveillance, in particular in good times, must be an integral part of closer coordination of fiscal policy. Also, compliance with the rules needs to be improved and more focus needs to be given to public debt to ensure the long-term sustainability of public finances. Member States should make sure having in place effective national fiscal frameworks. Recurrent breaches of the Pact should be subjected to a more expeditious treatment.

Broaden economic surveillance to prevent and correct macroeconomic and competitiveness imbalances

To prevent the occurrence of severe imbalances it is therefore important to expand economic surveillance beyond the budgetary dimension to address other macroeconomic imbalances, including competitiveness developments and underlying structural challenges. It is proposed to upgrade the peer review of macroeconomic imbalances now carried out by the Eurogroup into a structured surveillance framework for euro-area Member States by making use of Article 136 TFEU.

A European Semester to synchronise the assessment of fiscal and structural policies of EU Member States

Specifying the proposals in Europe2020 to better align economic surveillance, every year a “European Semester” would encapsulate the surveillance cycle of budgetary and structural policies so that Member States would benefit from early coordination at European level as they prepare their national budgets and national reform programmes.

Early guidance at the beginning of each year from the European Council on economic policies would facilitate the preparation of Stability and Convergence Programmes and National Reform Programmes. For the euro area a horizontal assessment of the fiscal stance should be carried out on the basis of the national Stability Programmes and the Commission forecasts.

Beyond emergency support, moving towards a permanent crisis prevention mechanism

Financial distress in one Member State can jeopardise the macro-financial stability of the euro area as a whole. Beyond urgent action that was taken earlier in May, a clear and credible set of procedures for the provision of financial support to euro area Member States in financial distress is necessary to preserve the financial stability of the euro area in the medium and long term.

When crisis prevention fails, financial assistance should be provided by the euro area in the form of lending, while the associated policy programme and conditionality should be set within Article 136 TFEU. To raise the necessary funds, the Commission would issue debt instruments when the need occurs, as is the case for balance of payment support to non-euro-area Member States.

The way forward

The Commission stands ready to follow-up swiftly with legislative proposals, including amending the regulations underpinning the Stability and Growth Pact, to enhance the prevention and correction of macroeconomic imbalances within the euro area, and to establish a more permanent framework for crisis management.

30 replies on “Reinforcing Economic Policy Coordination”

@Philip Lane

At the launch of your paper “A New Fiscal Framework for Ireland” in February, a number of people pointed out the inadequacies of the EU Commission and IMF reports on Ireland’s economy during the bubble. Some of this was put down to politicisation of the process. Do you see anything in the new proposals that suggests to you that these problems (and the potential for re-occurence) has been addressed?

“To prevent the occurrence of severe imbalances it is therefore important to expand economic surveillance beyond the budgetary dimension to address other macroeconomic imbalances, including competitiveness developments and underlying structural challenges.”

Will the focus here be solely on deficit countries? That would give a clear deflationary bias to the system, so one hopes not.

A european semester????…good night!!! Well there’s another movement of power from member states to the EU…it’s becoming more and more like a central government!

The Commission’s swift response means either (a) legislation will be poorly thought out or (b) eurocrats saw this coming along time ago and will have ‘here’s one we prepared earlier’ legislation ready to hand to be put under the noses of the council for rubber stamping.

According to the FT’s article on the new proposals:

“Financial markets want to see the eurozone’s most vulnerable countries introduce rapid measures aimed at controlling debts and deficits, but they are also keen to see an explanation from EU authorities about how they propose to generate economic growth so that the eurozone does not lapse into a decade of deflation.”

Indeed.

To hit two targets you need two instruments. Standard Salter-Swan logic suggests that if the Eurozone as a whole is going to engage in deflationary fiscal policy, the euro will have to weaken if we are not to see the decade of deflation the markets apparently fear.

Hopefully that will now happen (or, rather, continue to happen). Otherwise peripheral tightening has to be accompanied by the centre loosening, something which I doubt will occur.

@Kevin O’Rourke – “Otherwise peripheral tightening has to be accompanied by the centre loosening, something which I doubt will occur.” Angela Merkel has already announced that tax cuts in Germany (which the junior coalition partner had insisted on) are off the agenda for at least the next 2 -3 years – I can’t see much loosening there at the moment.

Lads,

I see DMcW suggests organised default today. I acknowledge my rookie status, but have to admit, I find the concept tempting. Is there a case for a synchronised PIIGS default? I know its taboo still, but as time goes on and the unthinkable starts to get traction, will this option start getting some airtime?

@ Sarah Carey

Colm McCarthy’s column in last Sunday’s SB Post said Greek default was a non-runner due to contagion risk to Spain, Portugal, Ireland etc. Perhaps an organised default (presumably DMcW means by the heavily indebted peripheral EU countries) would lead to contagion in the central EU countries? I’m always a bit suspicious of DMcW’s simple solutions – I think that things are rarely as straightforward as he presents them.

@All

This is expected. There has to be some level of coordination on policies around the members of the Eurozone. Interdependence and integration … the reality, as distinct from various ‘spy-in-sky get out of Euro scenarios’ which become a bit tiresome.

Paddy Orwell
I say they saw this coming years ago!

KOR
Agreed, but I have also said this was in the works for some time. Expect many slips in the process of lending, to ensure enough headlines to get the job done cheaply. Devaluation often become a competitive exercise …..

David O’Donnell
Agreed.

Ciaran Daly
They saw this coming and may have helped stuff the Irish banks for us ….. This is too good a crisis not to make use of it. All is going well for everyone except those who did not see it coming.

@ Pat
I agree. It makes you wonder why the great and the good of the economics world didn’t see it coming (or perhaps they just kept mum for reasons only known to themsevles).

@ Brian
What exactly do you find extraordinary? The fact that a mainstream political party (especially FG) are actually telling it as it is about the EU?

@ Brian Lucey

The reaction of Bruton shows that like the Bourbons, the political class have forgotten nothing and learned nothing.

In 2001, when the ECB and EC criticised McCreevy’s budget, the establishment, no longer in need of the begging bowl as they delusionally believed then, gave Brussels and Frankfurt a huge PFO and support for the government parties, jumped 10% in an Irish Times poll.

So for Bruton, the targets could still be met via a property bubble and Berlin and the ECB would be the bankers of last resort!

The IMF has said that Asia’s GDP will exceed the combined US and EU GDP in 20 years.

At some stage, the Germans who will gain from the rise of Asia, may rightly see merit in the return of the D-Mark.

@ Sarah Carey/Holbrook Fields

David McWilliams is presenting Bertie Ahernomics in new wrapping with a simple message for the great unwashed: bankers are gangsters and there is no need to consider pain as he doesn’t wish to alienate any other section in society.

Why worry about reforms whether in Ireland or Greece; let the Germans pick up the tab.

As the Greek PM said, you have to bribe your doctor to move up a hospital waiting list; the doctor is also bribed by medical suppliers and then he gives some of the bribe money under the table to the corrupt taxman.

Let the banks collapse despite the “masterstroke” guarantee, exit the euro, and default on the public debt.

Shur, it will all work out fine and David would pen a book on the shortcomings in the implementation. Maybe there are lessons from North Korea’s botched currency switch!

Then the consummate insider presents himself as an outsider; apart from the populist focus on bankers, don’t expect him to target the likes of professional fee cartels and other vested interest pillars of the orthodoxy, which remain firmly in pole position despite the crash.

I think Dr Nouriel Roubini has mentioned the need for debt restructuring too.

Arthur Beesley has an article on the controversy here: http://www.irishtimes.com/newspaper/world/2010/0513/1224270276814.html

The relevant clause in Article 136 ofthe Lisbon Treaty reads as follows:

1. In order to ensure the proper functioning of economic and monetary union, and in accordance with the relevant provisions of the Treaties, the Council shall, in accordance with the relevant procedure from among those referred to in Articles 121 and 126, with the exception of the procedure set out in Article 126 (14), adopt measures specific to those Member States whose currency is the euro: (a) to strengthen the co-ordination and surveillance of their budgetary discipline; (b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance.

2. For those measures set out in paragraph 1, only members of the Council representing Member States whose currency is the euro shall take part in the vote.

A qualified majority of the said members shall be defined in accordance with Article 238(3)(a).

The Lisbon Treaty: Putting the EU back into EUphemism!

Well we like good Europeans did vote for it! (At the second time of asking).

@ Ciaran Daly

How convenient!

Before any long-term reforms are in place, these countries, which were recklessly mismanaged while receiving huge transfers, should default and let others pick up the pieces.

Prudently managed economies should then guarantee them access to international bond markets.

Meanwhile, political leaders in well run democracies should sacrifice their careers for these retards.

Welcome to the People’s Socialist Paradise of Utopia!

@Michael H,

Hard to disagree with your take, but these required “long-term reforms” will not take place while countries are in crisis mode. In addition, I made the following observation in an earlier thread:

“Bondholders, ultimately, are the individuals, generally more well-off than average, who consume much less than they earn – or who have accumulated a nest egg. To ensure these “holders” of bank and government bonds don’t suffer a loss the enforced fiscal contraction is placing the burden disproportionately on those who consume what they earn or receive in the form of transfer payments, who have little or no margin of accumulated savings and who are least able to cope with reductions in, or increases in the costs of, public services. A general restructuring of bond debt (both bank and government) is required – with the haircut proportional to the coupon at bond issue. This is the minimum required for the sake of equity and the preservation of continued trust in democratic governance.”

“Caveat emptor” has to apply to those who bought bonds – and to those who provided the funds to buy these bonds – from governments which were clearly mismanaging their economies and from poorly regulated banks in these mismanaged economies.

What is roiling the great unwashed is why should bondholders be the only parties to escape unscathed from this debacle.

Paul,

I’m not saying there should be no restructuring but before IMF monitored reform in progress at least, it is not a feasible option politically for the prudent countries at this stage.

The Irish mentality is to plunder any public funds that can grabbed without regard to the common good; when it comes to funds provided by overseas taxpayers, the sense of entitlement is even stronger.

Today a conference in Dublin was told that middle range private sectors earners who are lucky to have an occupational pension – – a defined contribution one with no guarantee of payout – – should save 15% to 20% of salary to have a reasonable pension fund on retirement.

Guess what, as Cowen gave in to union pressure to protect the gold-plated public scheme, private pension funds invest in government bonds. So sticking it to bondholders is not like giving a hedge fund manger a bath.

The already threatened funds of ignored fools in the private sector can suffer as a result of restructuring.

The average annual return on 10-year Irish managed funds is 0.5% before inflation. So they are in the red already.

@ Michael

‘The Irish mentality is to plunder any public funds that can grabbed without regard to the common good; when it comes to funds provided by overseas taxpayers, the sense of entitlement is even stronger’

Your contributions are very erudite and professional, and your concern for the common good is apparent. Your issue about the state of defined contribition pensions is certainly valid, but your concern for overseas taxpayers needs further exploration.

Most folk really want to pay their way in this world, so they can feel good about themselves and leave something for the coming generations. Not everyone is lucky enough to get the necessary earning opportunities.

There is a long colonial legacy here, which is why we don’t have a broad based modern maunfacturing economy. Mere golbalisation didn’t, and can’t fix that deficit, and in some respects has entrenched our sectoral imbalances.

I submit that we can eventually resolve the issues, if we work out a more genuinely productive and sustainable basis for co-operation with each other, and with the ‘centre’. As Maggie Thatcher used to put it, TINA.

@Michael H,

Many thanks for taking the time to engage. There are two stages in a rational path to recovery from this debacle. All heavily indebted countries will experience economic pain and the first stage must focus on minimising this pain and ensuring it is borne equitably across the economy and society. There is both a perception – and enough evidence – that the “insiders” (in both the pubic and private sectors) are not shouldering a fair share of the burden and that it is falling disporportionately on those least able to bear it. The time-hallowed emigration safety valve may not be capable of relieving the pressure that is building up.

The second stage must address the failures of democratic governance, particularly in the PIIGS, that led to this debacle – and to prevent a repetition. As per the initial post in this thread, the preference of the EU elite is to remove fiscal policy discretion from the PIIGS – and any other smaller countries that threaten to upset the “core” consensus. This is profoundly anti-democratic. It’s a brutal “one strike and your out” policy. It’s more or less saying “You didn’t apply fiscal measures to lean against the monetary easing provided by membership of the Euro; things, not surprisingly, went pear-shaped; and we’re not going to give you an opportunity to screw up again.”

The reality is that political factions will do or say anything to secure the power asscoiated with executive dominance of parliament and the people in parliamentary democracies. (And it is often more by chance than fair-shooting that the “well-governed economies” you mention achieve this.) The most effective solution is to empower parliaments to hold these elective dictatorships to account. But this is seen as too difficult and the EU elite reaches for the centrally imposed solution.

And people may be happy with this. Over the years in Ireland, Spain, Italy and Greece I have encountered a welcome for government from Brussels as being much better thatn the inept and corrupt home-grown variety.

This is the question for voters in Ireland and the other PIIGS. Do you wish to devolve increasing responsibility for fiscal and economic policy to Brussels or are you prepared to force the changes in domestic democratic governance that are needed to retain a large measure of sovereignty in these areas?

As a compromise solution, could all Member States be required to establish independent national budgetary oversight offices that would carry out ex ante reviews of budgets? They could be established with the same remit based on an EU Directive. It’s something some states do anyway and many said Ireland ought to do it. It would address the sovereignty concerns of states and citizens but at the same time, the offices in different member states could coordinate their approach through a network as they do in competition matters for example to ensure best practice and coherency. All national authorities could use a common scorecard for assessing budgets and could have the same powers to require governments to revise fiscal policies that exceeded pre-agreed parameters.

“And people may be happy with this. Over the years in Ireland, Spain, Italy and Greece I have encountered a welcome for government from Brussels as being much better thatn the inept and corrupt home-grown variety.

This is the question for voters in Ireland and the other PIIGS. Do you wish to devolve increasing responsibility for fiscal and economic policy to Brussels or are you prepared to force the changes in domestic democratic governance that are needed to retain a large measure of sovereignty in these areas?”

I think FF would be happy enough to cede sovereignity if they thought they could stay in power. Many of our electorate could continue voting for the grand chap who got them the passport/medical card/match ticket. Aren’t they always on the look out for the bogeyman who told them they should do something unpopular rather than just get the CS to tell them its what should be done.
Having said all that I would welcome some control over the budget from outside, but not for the same reasons.

This is only a Commission proposal, let’s not forget…There have been reports that neither the Germans nor the French are that enthused.

@Paul Hunt
I think you put the key question at the end of your post – it boils down to whether we believe that we can govern ourselves properly or would be better off ceding sovereignty to Brussels.

In the midst of the calamity that has befallen us there has not been anything like the discussion that there should have been of the electoral system. We are electing seriously sub-standard people and they are focussed on the wrong things.I actually believe that there are enough talented ,honest people in Ireland to do the job right but we have to break the current system.
I am not keen on control from Brussels but unless we get a huge shake-up in how we govern and run ourselves I think I might prefer to take my chances with Brussels.

@Paul M – “We are electing seriously sub-standard people ”

I overheard an academic seriously stating the other day that he believed that if you took out a (small) handful of talented people from the Dail then the average reading ability would be about level 3. Most of them are not fit to govern but very good at attending funerals, nodding and winking, etc.

How could we impose some kind of ‘minimum levels’ of attainment and education on anyone who stands for office?

@ Paul M

‘We are electing seriously sub-standard people and they are focussed on the wrong things.I actually believe that there are enough talented ,honest people in Ireland to do the job right but we have to break the current system’

Many elected representative are not as slow as they may seem. You will find that they work their local bailiwicks very efficiently, and that their apparent ‘mediocrity’ is perceived as reassuring by most folk. Success is measured by the ability to working the inherited system, giving it a tweak in the right places.

Even if it is demonstrated that an individual representative is mediocre, the reality is that candidates are bred by a web of family, business and institutional connections. New applicants are welcome, but they have to be able to accommodate, and eventually emulate, the existing stakeholders. Like traditional music, politics is learned at the mother’s knee.

One of the best ways of concealing power is to put up a ‘soft’ image. Ahern’s role is best appreciated if he is seen as a product of the forces which made him and his party. FF successfully exploited its nationalist legacy by projecting an ‘American’ image of ordinariness, openness and opportunity. Serious PR investment was needed to do that when the genuine popular enthusiasm for FF began to flag.

Most of our corruption merely reflects a process whereby the insiders feel duty bound to loot the state, so as to strengthen their family connections and property holdings. It’s easy to see the malfeasance in the banking and nouveau riche property sectors, but the predatory practices of the ‘respectable’ professions are equally toxic.

No reform of the economy or our political institutions is possible unless the subversive influence of family and business dealings is brought into the open.

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