Commission calls for greater economic control

Barroso says member states must show they are serious about fundamental reforms.

The European Commission today (12 May) called for a major reinforcement of EU control over eurozone countries’ economic policies. It said that the EU needed stronger powers if the single currency is to survive.

“Member states should have the courage to say whether they want an economic union or not, because if they do not want that, it is better to forget monetary union altogether,” José Manuel Barroso, the president of the Commission, said.

He said that the seeds of the current eurozone debt crisis had been sown by a lack of policy co-ordination and enforcement, and reform was vital to prevent such a crisis from breaking up monetary union. “We really must show that we are serious about the fundamental reforms needed,” Barroso said. “We must now get to the root of the problem.”

The Commission’s proposals include the creation of a permanent crisis-resolution mechanism to provide financial support to eurozone countries that get into difficulties.

The mechanism would involve the EU issuing debt to finance emergency loans. It would replace the €750 billion ‘European stabilisation’ fund agreed by finance ministers on 10 May, when it expires in three years’ time.  

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Olli Rehn, the European commissioner for economic and monetary affiars, said that the mechanism would lend at “unattractive” rates “to prevent temptation for the leader of any country to fall voluntarily into this system”.

National budgets

The Commission is also proposing that it, and finance ministers, should be allowed to scrutinise the “broad lines” of draft national budgets before eurozone governments send them to their parliaments. Some governments, including Germany and Sweden, are opposed to this ‘pre-parliamentary’ scrutiny, on the grounds that it is too great an infringement of national sovereignty. Anders Borg, Sweden’s finance minister, has said that it should only be imposed on member states that are in breach of EU rules on fiscal discipline.

“Of course I am aware of the sensitivities relating to parliamentary sovereignty,” Rehn said, adding that the Commission was not interested in going through member states’ plans “budget line by budget line”.

But he said that it was “only right and legitimate” that the Commission should have a broad idea of member states’ fiscal plans so that it could “analyse and possibly make recommendations”. “The interdependence of our economies is higher than ever,” Rehn said.

Rehn also wants to strengthen the EU’s stability and growth pact. The pact, which is supposed to underpin the stability of the euro, requires member states to keep their deficits within 3% of gross domestic product (GDP) and their debt within 60% of GDP.
 
“The pact is a solid set of rules but it has suffered from a chronic failure to comply,” Rehn said.

Rehn said countries that repeatedly flout the pact should be hit with sanctions, including having to place a non-interest bearing deposit with the Commission and having their structural fund payments suspended.

Current legislation already allows the Commission to suspend payments from the EU’s cohesion fund to member states with irresponsible fiscal policies. Rehn and Barroso said, however, that this is an inadequate tool because the fund is used only in poorer member states, and that the EU needed sanctions that could be applied to all eurozone countries.

Rehn said that the 60% debt limit in the stability and growth pact “should be properly implemented at last, and this is one of the core aims [of the Commission]”. He wants member states’ deficit-reduction plans to have a greater focus on bringing down debt.

Fall in competitiveness

The Commission’s other proposals include that finance ministers should issue recommendations to countries with declining competiveness. It plans to issue formal warnings to countries that do not follow the recommendations. “We must address the macro-economic imbalances between our member states,” Barroso said. The Commission plans to draw up a scorecard assessing member states’ relative competitiveness.

The Commission’s proposals are focused primarily on the eurozone, although some aspects, such as the increased focus on debt reduction, apply to all member states. Some of the changes the Commission has proposed will require changes to EU law.

Rehn emphasised that the financial crisis, and more recently the eurozone debt crisis, had wiped out “20 years of fiscal consolidation” by the member states. The Commission estimates that average public debt in the eurozone will be 84.7% of GDP in 2010. Italy is forecast to have a debt level of 118.2% this year while for Greece the figure is 104.9%.