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The euro area economy is showing the first signs of recovery but there is no room for complacency as political instability and reform fatigue looms in several countries. President Barroso’s State of the Union message did not mince words when he said that progress on Banking Union is a vital requirement for economic confidence. The fourth round of the European Semester is now gearing up for the Commission’s Annual Growth Survey and Scoreboard report on 15 November. Will Germany be criticised for its continuing large current account surplus? However, this process seems to be stimulating the think-tanks into considering - yet again – if there should be a euro area institution to manage the beloved concept of the area’s ‘aggregate fiscal stance’. But the policy-maker community seems to have the rather more hard-headed approach that public backing for such a scheme is ‘barely discernible’.
President Barroso: State of the Union address 2013: "What we can and must do, first and foremost, let's be concrete is delivering the Banking Union. It is the first and most urgent phase on the way to deepen our economic and monetary union, as mapped out in the Commission's Blueprint presented last autumn”... "Our attention now must urgently turn to the Single Resolution Mechanism. The Commission's proposal is on the table since July and, together, we must do the necessary to have it adopted still during this term."
Barroso went on to warn: "At this point in time, with a fragile recovery, the biggest downside risk I see is political: lack of stability and lack of determination." Ahead of next year's European Parliament elections, Barroso also said that the EU should be "smaller" on some issues. "Not everything needs a solution at European level. Europe must focus on where it can add most value." "I believe a political union needs to be our political horizon”. “There are those who claim that a weaker Europe would make their country stronger, that Europe is a burden; that they would be better off without it. My reply is clear: we all need a Europe that is united, strong and open. The bottom-line question is: Do we want to improve Europe, or give it up? My answer is clear: let's engage! If you don't like Europe as it is: improve it!"
Reuters: Rehn says Europe must press ahead with economic reforms: Rehn said German Chancellor Merkel's strong showing in her country's election on Sunday demonstrated that Germany's push for economic reforms across the Eurozone will continue, something that is critical to the region's health. "It is now essential that we maintain the momentum on building a Banking Union, and in the Member States that we not allow any room for complacency but stay the reform course" with regard to labour markets and pension systems”. "There are certainly risks", Rehn said. "One is political instability, the other risk is policy and reform fatigue and complacency".
BFM/Schäuble: Ignore the doomsayers - Europe is being fixed: “While the crisis continues to reverberate, the Eurozone is clearly on the mend, both structurally and cyclically. What is happening turns out to be pretty much what the proponents of Europe's cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth. This has taken critical observers aback. It should not have, because, in truth, we have seen it all before: we still live in the real world, not in a parallel universe where well-established economic principles no longer apply… As the bust came, jobs vanished and public finances deteriorated. The reaction …followed a well-established recipe, not just by Germany but by the UK in the 1980s, Sweden and Finland in the early 1990s. The recipe worked then and it is working now, somewhat to the chagrin and bemusement of its numerous critics in the media, academia, international organisations and politics.”
EP: European Semester - How to improve the EU coordination of economic policies: Coordination should be more transparent and involve the European and national Parliaments more closely, according to Elisa Ferreira. The economic committee met in September to discuss the process with representatives of national parliaments. Ms Ferreira spoke out in favour of a new approach: "Countries need to get back in charge of the country-specific recommendations and the quality of the recommendations needs to be looked at". However, she added: "We also have to realise that countries aren't free to go their own way completely because of the impact they can have on their fellow Member States". Some of the national deputies present at the meeting challenged the need to comply with the recommendations. Jean-Paul Gauzès, a French MEP who monitors this issue on behalf of the EPP group, responded: "You need to be aware of the fact that those recommendations which emanated from the Commission were actually adopted by the Council. If Member States don't like the recommendations then they should object to them when they are up for an adoption."
Bruegel/Darvas & Vihriälä: Does the European Semester deliver the right policy advice? The July 2013 Council recommendations for the euro area recognise a number of fiscal and macro-structural challenges, but they do not go far enough in exploiting the policy options rendered possible by the European economic governance framework. Reference to the euro area's ‘aggregate fiscal stance’ is empty rhetoric. Insufficient attention is paid to demand management. The most comprehensive recommendations are made on structural reforms (labour markets, product markets, business environment, and public finance management). The President of the Eurogroup should continue the discussions on the completion of the economic governance framework, including the completion of the banking union and the setting-up of a euro-area institution responsible for managing the euro area's aggregate fiscal stance.
Barnier interview: The time for self-regulation and deregulation has come to an end: “What I proposed with the second pillar of the Banking Union is to manage these risks together. I am in contact with the German authorities and the German Finance Minister Wolfgang Schäuble whom I know well and respect, and we have the same kind of discussion that we had about banking supervision. I am confident that an agreement will be reached before the end of the year.” What is your personal vision of what Europe should do?Many citizens are concerned about a European project that has no limits or boundaries. I would argue for a European industrial policy. It is important that European leaders have found the courage and boldness they showed with the ECSC. I will also argue for a European Defence Community, which obviously will not be what was imagined in 1954. But Europe can also promote subsidiarity. The time for self-regulation and deregulation has come to an end. There were two major weaknesses: a lack of governance in the euro area and this unique ultra-liberal thinking in the field of financial markets.
Bundesbank/Weidmann: Striving for a stable framework for monetary union - An old debate revisited: In 1988, the Delors Committee tried to find an architectural model for an economic and monetary union capable of accommodating the inherent tension in that concept…The Maastricht framework instead focused on the one central supporting pillar: the fiscal rules designed to curb government deficit and debt levels. These rules were complemented by the no bailout clause. But this pillar proved unable to provide sufficient support. The capital markets' disciplinary effect on governments likewise proved to be inadequate. Why that didn’t work is quite easy to explain. Back then, the Basel Committee on Banking Supervision made what turned out to be a momentous decision for the euro area. The new common set of international capital rules stipulated that government bonds be valued as risk-free assets, which meant that banks did not have to back them with capital. In a nutshell, over a medium-term horizon, government bonds should be treated just like other bonds or loans to enterprises. Appropriate risk-weighting would drive yields higher for unsound sovereigns and raise their refinancing costs. Hence, the market mechanism would force these governments to exercise greater fiscal discipline.
An alternative to the "Delors house", a properly functioning fiscal union would depend on the Member States transferring a substantial degree of national sovereignty to the community level by giving the community the necessary right to at least intervene in the event of unsound public finances. Transferring sovereignty on this scale would be a radical change that would require wide-ranging legislative changes nationally and at the European level. Such a step towards greater integration would require not just political support but public backing as well. On this point, however, we should remain realistic: the will to do so is barely discernible.