Comments on the EU summit of February 3/4, 2011
Are Ms. Merkel’s angst of a “transfer union” and Mr. Sarkozy’s negation of the substance of a gouvernement économique causing the next crisis of the Euro?There is good news: Germany which for twenty years (since the beginning of the debate on the common European currency) had strictly denied the necessity of a closer coordination of European economic policy (beyond the Stability and Growth Pact) seems ready to accept such coordination (quasi accepting an “economic government” for Europe/Eurozone). Many commentators (among them myself) had in vain requested this as essential for the functioning of a common currency. The present crisis seems to have convinced even the most ardent hardliners.
But: Economic coordination can mean many different things. One needs to ask: Where is the Beef? When evaluating the proposals. At the recent European Summit, in a press conference France and Germany jointly proposed their “Pact for Competitiveness”. This consists of a tightening of the already existing coordination instrument, the misnamed Pact for Growth and Stability, similar to recent proposals by the European Commission. In addition, it proposes a series of mainly microeconomic (“structural”) measures, all designed to make all EU/Eurozone (it is not yet clear to whom the Pact shall apply) countries net exporters like Germany: among them is the ban to index wages to inflation – which in contrast to the Lisbon Strategy would prevent countries from aligning wages according to (nominal) productivity, in effect leading to lower wages and even less domestic (EU) demand. Other proposals concern a common, higher pension age and a constitutional “debt brake” mechanism (again à la Germany), in order to prevent increases in the debt ratio of governments.
Germany, which together with France drew up this proposal, requests its acceptance and implementation by the other EU/Euro countries for its own acceptance of the changes designed to make the European Financial Stability Facility more functional. The new pact should be approved at a special summit in March. But the price is too high. Tying approvals in one are to those by the partners in other areas never follows economic necessities.
The new French-German proposal represents a number of open questions:
- Many of the other EU member states, most of them small, oppose a “diktat” of two large countries, both for reasons of power politics and substance.
- Germany and France want this Pact to be implemented by the heads of state and the ministers of finance (the Council). The EU Commission which has drawn up similar plans, requests this right as having the constitutional right to initiate legislative proposals. This is not only a question of power politics (“who does what”) which mars many EU debates, but also one of democratic accountability, since according to the German/French proposal co-decision by the European Parliament would be avoided. In previous similar cases, the smaller EU countries went along with Commission proposals, because there they see their own interests safeguarded better than if two large countries dominate the outcome.
- Most important are questions of substance, however: as proposed, the pact ignores existing structural imbalances within the EU/Eurozone, or attempts to overcome them in a one-sided manner by wage reductions and fast budget consolidation, in order to make all countries as competitive as Germany. Competitiveness in this concept is defined only via unit labor costs, instead of recognizing that in addition, and in many cases much more important, the economic bases of many EU countries are so weak that even at zero wages they cannot export enough to pay for their imports. These countries require first and foremost a growth strategy which permits them to produce enough goods and services for internal and external demand, instead of imports. This does in no way mean attempts at autarky, but only for more balanced economic bases.
The beginning discussion of turning the large pots of EU agriculture and structural funds into growth-enhancing instruments, towards training and education, physical and immaterial infrastructure, “green infrastructure” and, above all, capacity to innovate, should be used to promote these aims.
- A common economic policy of the EU/Eurozone needs to make much more potential use of domestic demand strengthening, in addition of export orientation. This requires more expansive wage developments (both levels and increases geared towards nominal productivity as a minimum), in addition to harmonization of corporate and personal income taxes. A common economic area cannot be based on tax dumping by countries at the expense of their partners. Harmonization of tax bases and minimum tax rates are on the agenda: politically they are difficult to implement (see the perennial opposition from the UK and Ireland, with the recent addition of Slovakia), but they are essential to achieve.
- An adequate amount of tax revenue is necessary to maintain the welfare-oriented “European Model”. This model (in its various forms) is not only what Europeans want and important for social cohesion, but also because it increases productivity. The incipient attempts of many emerging countries, especially China, in starting to build up rudiments of welfare-state institutions (health care, pension system, unemployment insurance, poverty alleviation) are ample additional argument that present European standards be maintained and financed.
- Europe should have learned from the financial crisis that its supervisory system is inadequate and that the financial sector needs to be brought once again into the direction of a service function for the real economy, consumers and governments. The recent installation of three independent supervisory bodies for banks (London), insurance companies (Paris) and securities (Frankfurt) is only a minimal pace into the right direction of a centralized supervisory system for cross-border financial institutions. The next crisis will once again show the inadequacy of these efforts.
- The German price for its approval of a functional, if not monetary, expansion of the stability mechanism, enabling it to spend all its 440 m € in case of need, is too high, especially since this step still does not guarantee that enough money is available, in order to pacify the “markets”. It will enable the mechanism to take over some of the previous activities of the ECB, but no more. A general decision to issue Eurobonds (for all EU countries) would have been worth this price. The German Angst of a “transfer union” impedes a smoother functioning of the Eurozone.
Was the summit “much ado about something?” Hopefully, not about “nothing”. A veritable economic policy coordination mechanism, especially for the eurozone, but with a number of elements extending also to other EU members, is still a distant dream – and will remain on the future agendas of European Council Meetings.