February 26
2020
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14th February 2020
Banking & Finance

Op-Ed: “The Commission reviews the EU’s economic governance: There is time to reflect and time to act” by Napoleon Xanthoulis

On 5 February 2020, the Commission published its review of the EU’s economic governance framework. The Communication comes six years after the Commission’s previous review in 2014, and over a decade since the global financial crisis reached the euro area and became a catalyst for reforming the EU’s economic governance. In this piece, I will discuss some of the Commission’s key findings, adding critical thoughts in selective parts, and trace their capacity to inform the debate on the future of the Economic and Monetary Union (EMU).

In its review, the Commission evaluates the effectiveness of two main legislative packages, namely the ‘six-pack’ (2011) and ‘two-pack’ (2013) and kicks off a consultation process that will be completed by the end of the year. This legislation was introduced as an attempt to address some of the euro area’s structural weaknesses that were revealed by the economic and financial crisis. It aimed at a closer coordination of economic policies and strengthening budgetary surveillance.

On the bright side, the Commission’s report highlights the positive results in reducing national deficits. Today, no Member State is subject to the so-called Excessive Deficit Procedure, otherwise known as the ‘corrective arm’ of the Stability and Growth Pact. Clearly, the picture that emerges is different to the one in 2011, when more than 2/3 of Member States had exceeded their targets. There is also evidence that the EU’s framework has contributed to correcting the existing macroeconomic imbalances and reducing public debt. In the post-crisis era, the EU can be seen as more able to create sustainable growth, having strengthened its resilience and reduced some of its vulnerabilities to economic shocks. In addition, the establishment of a common budgetary timeline and the policy guidance issued on the basis of Member States’ draft budgetary plans has led to a closer coordination of fiscal policies within the euro area.

Notwithstanding these positive signs, the economy of several Member States has yet to reach the pre-crisis levels and, in some cases, public debt levels remain high, according to the Commission’s report. At the national level, public investment has decreased in the last decade, inflations remain persistently low, and reform efforts are weakened. Equally, national public finances have not become more growth-friendly, as Member States consistently opt to increase current expenditure rather than protect investment. What is more, the Commission’s findings suggest that several economies of Member States remain vulnerable to an economic slowdown with risks of spill-overs that would affect the functioning of the euro area as a whole.

As the Commission rightly points out, an important factor that negatively impacts on the effectiveness of the current regulatory framework is its inherent limitations. Although the Stability and Growth Pact has established procedures for correcting high public deficits, it is subject to important constraints, as it cannot compel fiscal policies in support of economic activity. In addition, the two-pack reform enables the Commission and the Council to outline measures to reinforce coordination of budgetary and macroeconomic policies at the euro area level: however, they are not able to enforce a fiscal plan for the euro area as a whole. The European Semester encourages Member States to consider the impact of their policies on the euro area, but, in reality, national plans remain primarily tight on national priorities. As long as the EU lacks central fiscal capacity, its ability to steer the impact of national policies on the euro area as a whole is restricted. Many scholars, like myself, consider that the EU relies disproportionately on monetary policy to maintain financial stability. Although, the European Central Bank (ECB) has proved its ability to stretch its mandate when called upon to do so, such as in times of crisis, I posit that this comes with unwanted normative, political and monetary side-effects.

The Commission’s assessment of the Macroeconomic Imbalance Procedure reveals that it has helped to focus national debates on policy action and deepen the dialogue between the EU institutions and national authorities on external imbalances, productivity, competitiveness, the housing market and private indebtedness. On the negative side, although the imbalances accumulated during the crisis are receding, the implementation of country-specific recommendations has somewhat weakened in more recent years. One obstacle that I identify here, and is not the only one, is that the EU rules cannot easily capture the different origins of fiscal instability within individual Member States as well as the key-factors that influence the impact and national ownership of the measures agreed between the EU institutions and national governments. Easing the existing formalistic approach may come with certain risks, however, there is a case that it can also bring potential unexpected value. By endorsing more flexibility and pragmatism in their monitoring policies, the EU institutions may be able to focus more on identifying those manifest national errors and policies that are capable of leading to unsustainable public debts. It would be interesting to see whether the Commission’s consultation process will shed some precious light upon the type of means that may increase effective enforcement of EU rules in this field, such as pecuniary sanctions, reputational costs and positive incentives.

The fact that all euro-area Member States that received financial assistance under the European Stability Mechanism (ESM) and its predecessors have returned to borrowing from the markets at reasonable rates is clearly welcoming, even if many Member States remain under post-programme surveillance. I was quite surprised by the Commission’s statement that the arrangements governing the involvement of the Commission and ECB in financial assistance programme have overall ‘worked well’. Although, following the Court of Justice’s judgment in Ledra Advertising it is clear that the conduct of the EU institutions under the ESM must be in line with EU law, there is still much to be done to reach a satisfying level of transparency and accountability in the activities of both EU institutions and the ESM as a whole. Furthermore, as I have argued elsewhere, potential conflict-related risks that arise from the ECB’s double hatting, namely its involvement in the provision of Emergency Liquidity Assistance (ELA) to individual credit institutions and its participation in the formulation of the macro-economic conditionality accompanying the financial assistance to Member States – remain unresolved.

The Commission’s acknowledgement that the EU’s fiscal framework continues to be excessively complex seems to me more like a truism. According to the Commission, these rules are generally perceived to be less transparent, thus, hampering predictability, communication and political ownership: ultimately, giving rise to inconsistencies between EU and some national rules. To an extent, one may argue that a level of complexity may be considered inherent within a multi-jurisdictional system of cooperation and governance that is aimed at achieving diverse objectives. The codification of the EU’s economic rulebook, however, is noticeably inaccessible; for instance, it contains diverse escape clauses that make the identification of applicable standards in specific circumstances a task that is far from easy, even for a dedicated scholar. We must be reminded that those rules were a compromise between Member States facing financial difficulties and other Member States that were called upon to provide financial solidarity whose priority was to limit both their own financial risks and future spill-over effects. Although it is true that rules which are adopted in times of crisis and as a matter of urgency rarely become legislative models, I am not convinced that the apologetic narrative of the euro area crisis can still justify retaining these weaknesses in the EU’s present economic context. To be honest, however, some of the shortcomings of the current regulatory regime are attributable to the underlying structural problems of the EU’s economic governance under the Treaties. They reflect the fluid demarcation between national and EU competences on the one hand, and the constraints of the powers of EU institutions, on the other hand.

Moving forward, now that the euro area appears to have overcome the existential threats of the recent crisis, its next steps are characterised by vast uncertainty. This is partly due to the absence of political consensus between Member States about the future path of economic cooperation and partly due to the normative and practical challenges that come with reforming the current regulatory regime without amending the Treaties. In theory, this uncertainty could be downplayed as an innocent side effect in the course of the EU’s post-crisis reflection period. However, at a time when the EU is surrounded by unseen challenges, the impact on the national economies can be unpredictable. For that reason, I posit that the euro area’s persistent vulnerabilities should hardly be underestimated. The EU is experiencing its first-ever shrinking, there is uncertainty in its present and future trading relationships, the threats to the environment increasingly become more apparent and the shadow of another refugee crisis can grow at a minute’s notice – these can be added to the EU’s internal rule of law-related cacophony – to name just a few of these challenges.

Overall, I take the view that the Commission’s review of the EU’s economic governance empowers the proposition in favour of rapidly deepening the EMU reforms. Introducing a centralised stabilisation capacity of appropriate size and the completing the financial union (Banking Union and Capital Markets Union) would play a pivotal role in facilitating market discipline and simplifying the design of an effective fiscal surveillance framework. Whilst negotiating these reforms, the EU must not relax its efforts to eliminate any existing deviations from its own rule of law thresholds. Maintaining a high level of transparency, credibility and accountability in the EMU still remains a work-in-progress. One area where improvements can be realised with comparatively less effort may be the Eurogroup’s function. Whilst the President of the Eurogroup increasingly engages in political dialogue with other EU institutions, the Eurogroup continues to largely operate behind closed doors. An important exception to this rule is when its decision-making practice occasionally reaches the public sphere in the form of books and media interviews by former Eurogroup members. More recently, the Eurogroup was assigned a leading role in a film by Costas Gavras. The film has yet to win a major award; to be fair, the Eurogroup has not done much better.

When the entertainment industry finds interest in EU economic governance, perhaps the time is right for a change.

Napoleon Xanthoulis is Senior Lecturer at Portsmouth Law School. Amongst his latest publications see, N. Xanthoulis, ‘Single Resolution Fund and Emergency Liquidity Assistance: status quo and reform perspectives on emergency financial support in the Banking Union’, in Gianni Lo Schiavo (ed.) The European Banking Union and the Role of Law (Elgar, 2019) pp. 269-288.

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