05 November 2013

EIM Budgetary October 2013

The 'two pack' comments on budgets will be public so that should step up the pressure on states to put forward budgets that should keep deficits genuinely in check. Will a further round of greater European control herald the need for a quite fundamental revision of the EU Treaties?

The `two pack’ comments on budgets will be public so that should step up the pressure on states to put forward budgets that should keep deficits genuinely in check. But a re-elected Chancellor Merkel is already indicating that even greater European involvement in budget-setting may be at hand. This debate should be clarified at the December European Council meeting when the ‘main features’ of `contracts’ between Member States and the EU will be fleshed out. Will a further round of greater European control herald the need for a quite fundamental revision of the EU Treaties? If so, resolution powers will certainly get tacked on. But will this trigger a UK referendum on EU membership even if there is an opt-out for the UK?

Dijsselbloem says budget extensions should be tied to reform: Dijsselbloem has floated a plan saying the currency union needs "more instruments" to get to grips with the twin challenges of excessive deficits and lacklustre growth. According to the FT, his remarks followed a speech in which he raised concerns that Brussels’ new "leniency" in austerity demands was coming "without any conditions". Dijsselbloem's proposal comes amid growing angst in several EU capitals, including Berlin, that recent market calm has led to a flagging of reform efforts in the periphery – particularly in Italy. Many officials worry that while taxes have been raised and budgets cut in many countries, economies remain structurally uncompetitive. This is because politically difficult liberalisations have lagged behind, making a return to growth more difficult. In particular France, Italy and Greece have come in for criticism.

Dijsselbloem's proposal to amend the EU Stability Pact was met with reluctance, especially in the northern European countries, writes the FAZ. Both the European Commission and the Federal Government on Tuesday commented that Dijsselbloem's ideas had in principle already been realised in the recently-adopted reform of the Pact.

The issue of ensuring weaker eurozone economies do not slacken reform efforts was also raised anew at last week’s EU summit. Angela Merkel, German Chancellor, again urged "contractual arrangements" between all eurozone governments and Brussels binding them to reform programmes. Only 10 per cent of the recommendations by the Brussels executive to the EU Member States had been implemented in 2012, Merkel criticised at the EU summit. Her claim was backed by Jörg Asmussen, the German representative on the Board of the European Central Bank, who said that with the Stability and Growth Pact, the "in principle correct method of economic policy coordination in Europe" did in fact "not work properly". However, EU Monetary Affairs Commissioner Olli Rehn defended the Pact, saying that the European Semester was "an unprecedented deepening of economic integration" and "works": budget deficits had been successfully halved since 2010.

Although the idea of such contracts had fallen out of favour since being raised by the European Commission last year, EU leaders agreed on Friday that their "main features" will be addressed at their December summit. Mr Dijsselbloem said his proposal was not intended as an alternative to the German-proposed "contracts" but followed the same line of thinking. In practice, however, it should be easier to enforce, as it would not involve Treaty change.

However, the Spiegel reports that in a meeting with President Van Rompuy, Chancellor Merkel set out her proposals for giving the EU greater powers over eurozone members’ national budgets, a move which would require EU Treaty change. Merkel will reportedly insist on legally-enforceable contracts between the Commission and individual Member States, setting out their obligations for maintaining budgetary discipline and improved competitiveness. In return, Germany could agree to a eurozone budget which would amount to tens of billions. Finally, the President of the Eurogroup would become a "Euro Finance Minister".

Merkel is aiming for sharp control and veto rights for Brussels and the transfer of far-reaching control over the budgets of the 28 Member States. Thus, the euro would be permanently stabilised. This route would involve far-reaching changes to existing EU treaties. According to the Spiegel, the previously unbinding "protocol 14" of the EU Treaty should be enriched with clear powers for the European Commission to conclude contract-like agreements for competitiveness and fiscal discipline with each euro country.

Merkel has already tested how her plans would be received by her partners. The response was more than subdued. "This will not be possible with us", signalled the SPD, with whom the CDU/CSU are about to enter into coalition negotiations. Spiegel Online cites Axel Schäfer, deputy-chair of the SPD’s parliamentary group as saying that "the SPD will not support any settlements if Merkel conducts parallel negotiations with Britain’s David Cameron over the transfer of EU competences back to Member States". Schäfer also warned that the SPD will not support any EU Treaty changes that trigger referenda in individual Member States. 

Even Martin Schulz, Socialist president of the European Parliament, has already warned the Chancellor internally that a Treaty change would be very difficult with him as EP President. The European Parliament has a clear cross-party consensus: national governments should stabilise the eurozone with the instruments that have been created over the past three years - without Treaty change.

Commission President Barroso responded to Chancellor Merkel’s demand for an EU Treaty change to give the European Commission control over eurozone national budgets and said “We need a strong [European] institution in the centre”, while urging a “step by step” approach.

Separately, Horst Seehofer, head of Merkel’s CSU sister party, said that the CSU does not want the “nation state to lose financial sovereignty” and that the competences of the Commission should not be increased “as long as we comply with the debt ceiling and the stability criteria”. "As you know, the draft budget for 2014 is the first since the entry into force of the EU regulations called "two-pack". We have to understand finally that we cannot have a monetary union but an economic and fiscal 'dis'union. And we can no longer tolerate that a country can let its deficits spiral and thus risk the macro-economic stability of the entire eurozone. Within the euro area, and because of the close cooperation that we have agreed between us, the economic, fiscal and banking problems of every single member can quickly become everyone's problem.”

Commissioner Barnier: The new EU budget calendar: The new autumn schedule will make it possible to follow the way in which the Country Specific Recommendations (CSRs) submitted every spring to each Member State are taken into account in the draft budgets of the following year, allowing Member States to make adjustments where necessary.

The Member States, including France, have been working together since 2010 to construct a new economic and fiscal governance, based on clear rules and enhanced coordination. For the first time this year, all members of the eurozone have to submit their draft budget to the Commission. The Commission will then issue an independent public opinion on the draft for each country by November 15.

This will now be the case since the opinion issued on each country will be public and the European Commission will submit a report to the Eurogroup on the budgetary situation that would result, for the euro area as a whole, if those 13 draft budgets were to be adopted. The new autumn schedule established by the "two pack" will be organised in conjunction with the "European Semester": it will allow for the budgetary recommendations of spring to be effectively reflected in the budget. “On the one hand, we are now more aware of the importance of public debt, since the entry into force of the "six pack" in late 2011 which corrected some weaknesses of the Stability and Growth Pact. I would add that the new autumn schedule (the "two-pack") is there precisely to help members of the eurozone to avoid sanctions because countries will see how the recommendations for each country made in the spring are included in the draft budgets for the next year, and if necessary, it will allow states to make adjustments. The new rules of the "two-pack" are useful for both parliaments and governments of the euro area Member States. Basically, what we do can be described as a "monitoring group" for the mutual evaluation of economic and budgetary policies."

© Graham Bishop