Europe’s economic governance: context and reform prospects

2016-01-27

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This article was originally published on January 26, 2016 in the online version of the journal of the Catalan Greens. Special thanks to Lluís Camprubi (@lluiscamprubi) for making the relevant contacts.

European integration advances in a stepwise fashion. Gradual changes are made to an ever-expanding nexus of legal and institutional arrangements. In its first decades integration was limited to economic affairs. It was focused on dismantling trade barriers between Member States. With the Treaty of Maastricht in the early 1990s the project was re-founded on a much more ambitious basis: (i) to broaden the scope of the supranational level to cover policies beyond the single market, and (ii) to introduce a currency—the euro—to epitomise the progress already achieved.

The intent of European leaders was to offer a renewed impetus to the process. They wanted it to accelerate, paving the way to political unification. While their idea may have been sound, its execution was problematic. The euro, a monetary instrument, was judged with political criteria, while the emerging Economic and Monetary Union (EMU) was not supported with the necessary legal-institutional means for functioning as a truly integrated whole.

A currency area must be composed of parts that have achieved a high degree of convergence. If that is not the case, which usually is not, it must have an area-wide fiscal capacity that can transfer resources between the parts for the purpose of addressing any systemic asymmetries. To this day the euro has none of that. The eurozone comprises parts with quite diverse economic structures and outlooks, while the EMU does not feature a fiscal authority to complement the European Central Bank.

What the EMU provides for is a framework of common rules with little common politics. Its governance is coordinated between national governments, while the European Commission acts as a supervisor. A single ruleset is to be respected by each country. If the targets are not met, the Commission can impose sanctions, while other governments may exert pressure. There are three separate intergovernmental entities involved:

1. the European Council, the EU’s deciding executive, which brings together the heads of state or government of each nation;
2. the Council of the EU, a co-legislative institution (together with the European Parliament), which is composed of national ministers;
3. the Eurogroup, a quasi-legal formation made up of finance ministers of euro Member States, which acts as a de facto “Euro-specific European Council”.

All are fora where national interests confront each other. Sometimes a suboptimal compromise is reached. Otherwise things come to a standstill, waiting to be resolved once a crisis leaves no alternative. What is not represented in these intergovernmental arrangements is the European interest at-large: not the good of a nation state or group thereof, but of the whole system. Had it prevailed in the past, the euro would already be underpinned by a fiscal, financial, and political union.

It thus is no coincidence that we refer to “governance” rather than “government”. The present order exhibits a sovereignty mismatch: there are provisions for the whole system, but no unified political entity capable of claiming ownership over them. For citizens this practically implies that the EU represents a set of laws detached from a governing body that could be voted out of office in general elections.

For the sake of democracy and efficiency, the locus of power has to be shifted away from intergovernmentalism and its backdoor grand bargains. A more streamlined, Union-based mode of governance has to be instituted by means of a new Treaty.

At first, recognise that the euro and non-euro areas have vastly different needs and priorities. Provide for a euro-specific legislative procedure.

Secondly, make the Eurogroup a proper Council formation, co-legislating over euro issues. All of its documents will then have an “official” status, which will eventually render them accessible to the public.

Thirdly, confer to the Union certain taxation competences for introducing taxes that can apply to its entirety. These can finance a European budget and enable the Treasury to issue its own debt instruments: eurobills and eurobonds.

Fourthly, place a political office—a European finance ministry—in charge of economic governance. It would have the dual task of enforcing the rules as well as initiating EU-level investments to cancel out any recessionary pressures.

Fifthly, split the Commission into two: (1) an elected executive, and (2) the EU’s public service. Currently the Commission is supposed to be a technocratic institution, yet it is led by prominent politicians and makes political decisions, all while purporting to do just “technical” work.

It is understandable, given the inherent gradualism of European integration, that a new Treaty will not overhaul the EMU. It also is unlikely that intergovernmental negotiations will deliver an ambitious plan. Still, reform is necessary. Even relatively minor changes can have a major impact, making the EMU more democratic and balanced overall.