The referee toughens up
European member states have significantly increased the monitoring powers of the European Commission (EC) throughout the crisis, thereby doing what they should have done with the Stability and Growth Pact (SGP) 15 years ago. The so-called “Six Pack” which entered into force in December 2011, provides teeth to the SGP – in the form of more important monitoring powers for the EC and financial sanctions for non-compliant member states. It also allows the EC to monitor macroeconomic developments in member states under the Macroeconomic Imbalances Procedure (MIP): if certain thresholds are breached (deficit, debt, external position, etc.), the EC may perform further analysis and eventually require member states to take action or be fined. The intergovernmental Treaty on Stability Coordination and Governance (TSCG) defines the Excessive Deficit Procedure (EDP) and allows the European Court of Justice to impose financial sanctions (0.1% of GDP) on member states in case of non-compliance. Finally, the “Two-Pack” allows the EC – through the “European Semester” – to review euro-area member states’ national budgets before they are voted by national parliaments, which is a very significant shift.
Good economics: avoid the building up of imbalances and crises
The rationale underpinning this alphabetical soup of regulations is rather simple: member states’ economic policies have an impact on one another. Such interdependence is a source of prosperity in boom times, which is precisely why the European Single Market was created. In times of economic recession however, fiscal and budgetary policies negatively impact neighbours, through various channels: lower external demand, repatriation of capital, depressed confidence, etc. In November last year, the EC started to use its new powers, in order to avoid future conflicts over “beggar-thy-neighbour” policies. It considered Italy’s budget would not allow it to reach its debt sustainability targets and hence required the government to review its assumptions, it warned Spain that its deficit could slip away if things got worse, and it told France it was on track but had no margin for error.
Most importantly though, the EC decided to address the elephant in the room and told Germany its current account surplus was a source of imbalance for the euro area. Germany’s export performance is not a problem per se; on the contrary it is a valuable asset for the European economy. The problem lies in the deficit of internal demand, which translates into weak imports and hence a high current account surplus. It is a source of weakness for the euro area because it means Germany benefitting from foreign demand without compensating with internal demand – which effectively reduces European aggregate demand. It would have been close to impossible for any euro-area member state to confront Angela Merkel on this topic: they are either politically too small and economically too weak to lecture her. Hence, it is good to see the EC applying the same rules to all member states, even though it is unlikely this will lead to any concrete action.
Bad politics: federalism through the backdoor
Although these measures make sense economically, their democratic legitimacy is highly debatable. Indeed, these measures have been agreed upon by democratically elected Heads of State/Government in the European Council, and members of the European Parliament. The problem is that these reforms imply new and wide-ranging transfers of sovereignty without any fundamental change in the way decisions are taken: behind-closed-door deals between decision-makers’ with national or regional – not European – mandates. This used to be the method pursued by former EC President Jacques Delors: enact a package of measures pretending they are merely technical whereas in aggregate they imply wide-ranging political choices. This works when people massively trust your project and the administration implementing it. But with confidence in the EU plummeting, this is the best way to increase Euroscepticism and ‘plot-theory’ populist parties.
Some would argue that asking people – whether through normal elections or referenda – whether they want the EC to control national budgets would be suicide. Indeed, but this is because this issue should be just one part of a wider political project: a united Europe which enables itself to be efficiently governed, in order to achieve whatever objectives voters would assign it. But instead of having a dynamic European political sphere making such proposals, we have a diplomatic sphere with decision-makers striking intergovernmental deals, which need discretion and not public debate. The 2014 European elections are the opportunity to break this habit.