Divided Europe flunking economic rulebook tests

By Matthew Saltmarsh

Date: 10/06/04

ON THE shores of Lake Stresa last Autumn, European finance ministers attempted to thrash out how farthe EU's economic structures shouldbe modified to create a moregrowth-friendly environment. The debate was inconclusive and since then expectations of imminent reform have been greatly scaled back.

Before that meeting, there had been a sense that the EU constitution, expected to be adopted next week, could be a vehicle for enacting economic reforms such as layingdown the mandate of the informal 'eurogroup' or adapting the fiscal rulebook, the Stability and Growth Pact.

But many of the issues have been put on the back-burner and some may be kicked into the long grass because of fundamental differences on where to go and the fear of some non-euro countries being further alienated from the economic decisions.

“We will not have very substantial changes on economic governance from the constitution,” predicted Siim Kallas, the Estonian commissioner who has been following economic issues here. He foresaw only minor changes to the workings of the eurogroup.

Last week, French Finance Minister Nicolas Sarkozy revisited the debate at a meeting in Luxembourg, calling for “improved efficiency” from the eurogroup. “The more numerous we are, the more coordination we need,” said the minister.

“We spend too much time every meeting talking about economic developments,” added Dutch Finance Minister Gerrit Zalm. He wanted more focus on economic reforms “andless on the latest forecasts onthe economy”.

But the discussion ended up going around in circles. “It was a very long debate, but there are still a lot of different views,” said Greek Finance Minister Giorgos Alogoskoufis.

The eurogroup, which brings together the 12 eurozone finance ministers, the Commission and the European Central Bank (ECB) for closed-door sessions, can only make formal decisions within the Ecofin meeting of all EU finance ministers on limited issues relating to the euro area. These include some aspects of the excessive deficit procedure under the Stability Pact, exchange rate policy andpre-euro rules, appointing members of the ECB executive and coin issuance. But the freewheeling informality of the dinners generally sets the tone for what happens the next day atthe broader Ecofin meeting of25 ministers, who retain formal decision-making power.

Among the proposals aired last week was Sarkozy's plan for using independent experts to complement the analysis of the Commission and the ECB.

Also discussed were the creation of a more formal structure for the eurogroup via a protocol annexedto the planned constitution and extending the rotating presidency from six months to two or two-and-a-half years.

The ministers also reflected on whether the interaction between the eurogroup and the ECB could be strengthened, how the group could better coordinate polices internally and whether its role in assessing fiscal transgressors should be firmed up.

While Sarkozy has reinvigorated the debate, one eurozone diplomat was sceptical about where things were going: “There are still a lot of ideas knocking around. Not many are new.” He agreed it was unlikely any changes to the eurogroup would be included in the constitution set to be agreed at the European Council on 17-18 June - beyond those already contained in the draft under discussion.

The crucial issue is likely to play out in the first half of 2005 under the Luxembourg EU presidency, as the Stability and Growth Pact is expected to be adapted following dissatisfaction from members at the inflexibility ofits rules. Much will depend on the outcome of the Commission's challenge in the European Court of Justice to the finance ministers' decision last November not to reprimand France and Germany over their excessive budget deficit. A result in that case is expected before the summer recess.

Brainstorming is already going on in think-tanks and among deputies. The Commission will outline its own ideas in coming days, but the debate won't start in earnest until there is a new College of commissioners inthe Autumn.

Ideas that are emerging centre on introducing more symmetry over the economic cycle - for example, using “rainy day” buffer funds from economic upswings to cushion the blow to finances of a downturn. Some large euro countries would also like to see the pact's definition of “exceptional circumstances” changed to better take account of economic realities.

There might also be a formal recognition of the “case-by-case” thesis whereby countries are given “moving” individual targets depending ontheir cyclical progress. Academics such as André Sapir, who has advised the Commission, have argued that decision-making should be taken away from politicians and given to national commissions that could take impartial decisions. Implementing the idea, however, seems fanciful.

• Matthew Saltmarsh is a Brussels-based financial journalist.

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