Euro-11 builds an ‘economic government’ for the single currency area

Date: 01/06/2000

As the second anniversary of the Euro-11 group of finance ministers approaches this weekend, Tim Jones considers how its role has evolved since it was set up and examines the significance of recent calls for its 'political identity' to be strengthened

PEDRO Solbes was genuinely puzzled. Why, the whispering European Commissioner for economic and monetary affairs asked himself, are all these reporters making such a fuss about a bunch of technical guidelines?

On a good day, his new benchmarks for judging when euro-zone governments should or should not cut taxes would have been buried among a raft of press releases on everything from state aid to Dutch film-makers to the latest speech by one of his Commission colleagues.

Unfortunately for Solbes, the guidelines had been both leaked and 'spun'. By the time they were published, the lid had been lifted on two linked processes: the increasing influence of the Euro-11 ministerial coordinating group and the growing importance of peer review in the setting of budgetary policy. Together, they are building an economic government for the euro zone.

Since he took office, Solbes has made no secret of his desire to change the way EU finance ministers and their cabinet colleagues think about fiscal policy-making. Instead of remaining fixated on the ratios set out in the 'stability pact' on budgetary discipline - capping deficits at 3% of national income at all times and at 1% in boom years - the former Spanish finance minister was anxious to embark on "a new phase of budgetary reform".

In this new era, member states would keep the ratios at the back of their minds, but concentrate on improving the "quality of public finances" - a phrase enshrined as the key policy goal in the conclusions of the March Lisbon summit.

Solbes had been dismayed by the sterility of the row before he took office last autumn over whether the Italians should be allowed to miss their 2%-of-GDP deficit target. Rome's budgetary policy was as tight as ever, generating huge surpluses once interest repayments were taken into account. The dispute showed how dangerous it was to fetishise the deficit ratios.

After all, any one can hit a deficit target eventually. It is much harder for finance ministers to make their cash work for them, ensuring maximum investment returns rather than simply raising revenue to match unproductive spending.

This is why Solbes drew up the benchmarks for assessing how appropriate tax cuts are when set against the goals of 'convergence programmes'.

On the basis of what he thought had been agreed by ministers, he concluded that tax cuts should always form part of an overall package to boost output and jobs, should always be matched by spending cuts unless a budget is "close to balance", and should never fuel an economic boom nor ignore a government's debt stock.

When Swedish Finance Minister Bosse Ringholm denied that all 15 Union finance ministers had agreed to this approach at the 28 February Ecofin meeting, Solbes pointed out that he had presented his ideas to the Euro-11 in the morning and then again to the four 'out' ministers at lunch time - and nobody had objected.

Apart from demonstrating what Council of Ministers Deputy Secretary-General Philippe de Boissieu revealed recently - that ministers do not listen to discussions - Solbes' remarks were also highly revealing about the Euro-11. A quick-fire decision was made in this streamlined body and then played back to the four outsiders.

The Euro-11's early days were lifeless. The Germans and the British had opposed its creation, albeit for different reasons. Germany feared it would seek to rival the European Central Bank, while the UK worried that it would start to usurp Ecofin's powers.

British Prime Minister Tony Blair is getting more worried these days. A centrepiece of French Premier Lionel Jospin's presidency of the EU in the second half of this year will be a bid to "reinforce the role of the Euro-11 and ensure the co-ordination of our economic policies, with the aim of assuring a better understanding of euro-zone economic policy and the political authority".

Blair's new ally, Belgian Premier Guy Verhofstadt, has also chimed in with a pledge to "strengthen the political identity of the euro zone" once his Finance Minister Didier Reynders takes over the chairmanship of the Euro-11 for the whole of next year.

The British premier thought he had succeeded in killing off such ambitions with a tightly written agreement at the December 1997 Luxembourg summit, but that was a lawyer thinking rather than a politician.

In formal decision-making terms, the Euro-11 cannot take over from Ecofin. But, in practical terms, it has already become an indispensable forum for ministers and the ECB's top brass to pool ideas, swap forecasts and trade off policy initiatives.

Chaotic early Euro-11 sessions have been replaced by agendas crafted by Jean Lemierre, the outgoing French treasury chief and ex-chairman of the Union's influential Economic and Financial Committee. In October, Euro-11 ministers held the kind of discussions on the French, Spanish and Irish budgets that Ecofin would never dare to have.

Locked away from advisers and note-takers, the other eight ministers and Commission representatives did not pull their punches. All argued that France and Spain should be more ambitious in cutting their deficits given the acceleration of economic growth in both countries while the ministers 'on trial' defended themselves vigorously, arguing that the extra revenues from growth could not be counted on.

For his part, Ireland's Charlie McCreevy, who faced criticism for failing to use fiscal policy to dampen runaway inflation, argued that his 5%-of-GDP surplus was already large enough.

The Euro-11 has faced criticism in the financial press for failing to come up with a common line of support for the weak euro. For a long time, ministers in slow-growth economies such as Germany and Italy were perceived by the markets to be happy with the currency's weakness against the dollar.

It was under the chairmanship of Finnish Finance Minister Sauli Niinistä last year that the Euro-11 first began to challenge that view. Ministers agreed to refrain from making public comments about the currency but, if pressed, said they would sing Niinistä's line: "The euro has the potential to appreciate based on internal price stability. As the euro-zone economy recovers, this is likely to be reflected in the euro in due course."

As the the currency sank below 90 US cents last month, the Euro-11 under Portugal's Joaquim Pina Moura decided that the first formal statement in its 16-month history was called for. The fact that the euro continued to fall afterwards shows that currencies cannot be "talked up" without a belief in the markets that underlying conditions will change soon, but the statement was highly significant all the same.

Firstly, it contained a pledge from the ECB representatives at the Euro-11 that the euro zone's oncoming growth spurt would "remain non-inflationary". Secondly, in return for this promise, ministers promised to "speed up ongoing fiscal consolidation and structural reforms towards a knowledge-based full-employment economy, thus increasing the growth potential of our economies".

The Euro-11 is the only forum where the ECB and ministers can discuss such trade-offs, and it is proving to be an invaluable tool. "Quite a few ministers are genuinely surprised at how useful it is; they thought it would be just another talking shop," says a senior official. "All it has done is highlight the weaknesses inherent in the Council."

Discussions are focused, time-limited and confidential. Ministers have to be present, prepared statements are frowned upon and limits on numbers present are set. There is no stopping the Euro-11 now. In the words of one official, "it has momentum".

Major feature. As the second anniversary of the Euro-11 group of finance ministers approaches, article considers how its role has evolved since it was set up and examines the significance of recent calls for its 'political identity' to be strengthened.