On the European Finance Minister

2015-10-30

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In the present essay, I comment on an October 23 policy paper from Henrik Enderlein and Jörg Haas of the Jacques Delors Institute on the possible competences and accountability structures of a European Finance Minister.

While I strongly recommend you study their proposal, I will try to provide some informative quotes of theirs so as to contextualise my comments.

As an introductory remark, I should note that the idea of a European Finance Minister (hereinafter also referred to as EU-FM or just Finance Minister) conforms to a confederalist approach to the European integration process. While I, as a federalist, would rather have a more straightforward arrangement, I do think there are qualitative differences between the present quasi-confederation and a confederation proper, which render the latter far more preferable to the former. Put differently, I would be in favour of any proposal to make the EU function as a genuine confederation than remain in its current, largely sub-optimal form or even be rolled back to its pre-eurocrisis design.

My comments are divided in two main sections, covering (i) the responsibilities of the Finance Minister, and (ii) the legitimacy and accountability structures.

Responsibilities of the Finance Minister

Enderlein and Haas present five areas where the European Finance Minister’s authority would be made manifest, particularly in:

• overseeing economic governance;
• politically validating the enforcement of the rules;
• leading negotiations for crisis resolution;
• contributing to efforts for the mitigation of regional shocks;
• being the person who represents the unified international personality of the euro area.

Economic coordination

Coordination already is the objective of the Economic and Monetary Union’s (EMU) provisions on economic governance. The current rules-based model sets the parameters within which fiscal and economic policy are to be pursued at the national level, under the supervision of the European Commission. The assumption is that if all Member States commit to implementing the EMU’s legal framework, economic coordination will be the eventual outcome: all will be pursuing the exact same set of objectives, without needing a supranational ministry to steer such coordination in advance or during the process.

Where the current model suffers is in its inherent one-sidedness: the fact that it has no two-tier structures for differentiating between individual national fiscal positions and a supranational, EMU stance. Even if all national governments follow every piece of law to the letter, the result for the EMU at-large may not be the most optimal. These national economies are not merely bound by the same legal framework over fiscal and economic policy. They are integrated into a single market, have a single currency, their banking sectors are increasingly becoming inter-connected, while the tools at their disposal for adjusting to asymmetric shocks are rather limited. In short, there is a high degree of inter-dependence.

The rules-based approach treats national governments as economically sovereign, at least nominally, when the truth is that they are anything but. Policy should be designed with the reality of partial national economic powerlessness in mind, rather than make brave assumptions on the capacity of each state to gracefully adjust to the vicissitudes of the trade cycle.

Under the scenario where all governments strive to consolidate their budgets there may be an aggregation of fiscally balanced positions, but that may happen at the expense of, say, underinvestment for the system as a whole. In times of an economic downturn, this implies that the recession will be lengthened and deepened. It is kind of the “paradox of thrift” operating on an inter-state level, whereby every state enforces a parsimonious policy to make its fiscal stance more robust to external shocks, yet with all of the states doing it simultaneously there is a drop in aggregate demand, which contributes to the downward pressures, reinforcing the need for further budgetary contraction, and so on.

Whereas a two-tier system, where the supranational stratum has a fiscal capacity (raise taxes, issue debt) of its own, could afford to differentiate the fiscal positions among the Member States and between them and the supranational level. For instance, a country with an excessive deficit would be tightening its spending, another with a more solidified position would engage in moderate spending, while the supranational institutions could launch an expansionary policy.

The difference in the fiscal position between the two levels of government would help balance out the overall fiscal stance of the system, ameliorate any of the deleterious effects of prolonged austerity at the local level, and provide the foundations for an investment-led recovery. Furthermore, it would offer an antipode to the European Central Bank’s inherently uniform ordinary monetary measures, providing the necessary flexibility to counter whatever negative effects germane to its “one size fits all” policy.

Couched in those terms, a Finance Minister tasked with overseeing the coordination of economic governance and with bestowing a degree of political legitimacy on the relevant rules will only succeed in improving the overall credibility and enforceability of the EMU’s legal framework. Given that the existing system is not excelling in the area of enforcing and implementing the rules, any reform in that direction must be considered welcome, provided it is commensurate with the necessary structures for legitimacy and accountability (more on that below).

Crisis management

Engelrein and Haas write thus (emphasis my own):

Should a euro area member state need to rely on emergency credit from the ESM or a successor institution, the minister would act as an “honest broker” by leading the negotiations about adjustment programmes and monitoring progress. The negotiations with Greece showed that such an actor is needed. When the final deal was negotiated, the key actors were German chancellor Merkel and Greek Prime Minister Tsipras. What was missing, was a strong and unique “European” voice at the table, representing the interest of the euro area as a whole. When euro-area negotiations become purely intergovernmental, the single currency is systematically at risk. The interest of member states is by definition not the interest of the euro area or the European Union as a whole – and neither should it be. (p.6)

I have written several articles where I propound arguments along those lines. Indeed within an inter-governmental framework there is no entity which represents the interests of the Union at-large. I would even add that this is not peculiar to the crisis management negotiations, as it is a feature of the euro: it is stateless fiat money, in the sense that it is not underpinned by a genuine state (the EU/EMU is not a state), the ECB lacks a counter-party European Treasury, there is no fiscal backstop for the euro area as a whole anchored in EU law, its policy is determined within the framework of economic governance whereby “governance” denotes a set of procedures, not a political body, and so on.

While I do think that the authors of the policy paper make sound proposals on how to make the EU-FM the “honest broker” and “the face” of any bailout programme, I am concerned that this kind of thinking is heavily informed by today’s reality and ultimately remains confined to it.

The flaws of the “troika” formation are manifold and need not be reproduced herein. Still, it provided for an ad hoc response to a crisis that the architects of the euro had not foreseen, or to which they had provided no adequate policy instruments. Much of the euro crisis has been characterised by extended negotiations on how to retroactively correct the design flaws of the single currency. While critical of inter-governmentalism, we should acknowledge that in the midst of the crisis, with the EU/EMU caught largely unprepared, only inter-state bargains could deliver politically feasible solutions. These have been admittedly sub-par, though they probably were the best of political deals under the circumstances.

A European Finance Ministry is no ad hoc institution. It will be carefully designed and be embedded in a broader institutional framework that will incorporate the lessons learned from the crisis. For instance, prior to the crisis the euro area had no fiscal backstop whatsoever. Currently, there exists the European Stability Mechanism, which is an inter-state institution outside EU law (it is founded on the ESM Treaty). The idea would then be to transform the ESM into a European Treasury—not a European Monetary Fund—rooted in the Community’s legal corpus, and placed under the political direction of the European Finance Minister.

The point is that in an institutional landscape that has all the building blocks of a fiscal union, there is no need for continued inter-state negotiations on resolving a given economic crisis. Any response on that front will be headed by the Finance Minister, who will be enforcing the fiscal and economic rules of the EMU, while using the Treasury to direct resources wherever necessary. Anything that may resemble the troika, in either setup or decision-making, would be superfluous.

Rather than thinking about troika-like assistance programmes, it would be preferable to envisage a legal-institutional framework within which Member States can default on their debts while remaining part of the euro area. Since a new Treaty will be needed to establish the Finance Ministry, efforts could also be directed towards designing a Debt Redemption Fund and Pact (DRF/P). There already exists an EU study on the matter (pdf), published on March 31, 2014. To quote from paragraph 59:

The DRF/P has two basic components: a ‘fund’ and a ‘pact’ that only together create a scheme that can achieve its purpose, i.e. to reduce, through temporary (over approx. 25 years) mutualisation of debt, the current public debt overhang and thereby create the conditions for a stable state of EMU. After the DRF/P ends, financial risk sharing would be limited to the financial stability mechanisms, be subject to strict conditionality and be activated only as a last resort measure in an acute crisis. (p.22)

While the specifics are not pertinent to the current article and though a future Debt Redemption scheme need not be along those lines, it suffices to note that such an instrument can be appropriately designed to push economic governance and its concomitant elements beyond inter-governmentalism and toward the direction of Union-based action.

If instead the ESM is to be transformed into a European Monetary Fund, the system would be preserving at least the following:

• the illusion of fiscal sovereignty for each Member State, which is reflected in the expectation that they can adjust to asymmetric shocks on their own means and that they can indeed repay, at least in an ex ante sense, whatever debts they may assume in the process;
• the implicit guarantees to private creditors (bondholders), since the state to which they will be lending money will, by design, be forced to pay them back by taking on new loans from the EMF.

With the supranational level having a fiscal capacity of its own, and a political institution with the authority to exercise economic governance and reallocate funds, there is no good reason to pretend that national governments are still in full control of their own fiscal policy. By having transferred a significant part of their sovereignty to the Union, they effectively gave up the corresponding responsibility. To that end, they should not have to bear the brunt of any economic adjustment, nor should their creditors be indirectly bailed out for their profligate lending.

Unified representation

I have already produced an article where I comment on the European Commission’s proposal to have the Eurogroup’s President represent the euro area at the International Monetary Fund.

In my understanding, this is the first step in a longer process of transforming the EMU from a quasi to a proper confederation, in the sense that it will gradually attain a single international personality.

[see: On the unified representation of the euro area]

[also see: EU Confederation: exchange of views with Jakub Jermář]

Legitimacy and accountability structures

Enderlein and Haas write:

There can be no doubt that an EU-FM’s powers would be far-reaching. She would therefore need to be subject to appropriate democratic control. The straightforward choice would be the European Parliament as the natural check on European executive power. However, the EMF’s actions would have a direct impact on national budgets. It would likely help acceptance in Member States (and might alleviate constitutional concerns) to include national parliaments in the process. They could form a joint committee with representatives of the European Parliament, possibly consisting of two delegates from each national parliament and half the number of MEPs. (p.11)

The authors also have a very nice graphic to illustrate their point. However, since I have not asked for permission to reproduce it herein, I link directly to it.

On the gist of the proposal, I very much agree with the idea of creating a joint committee with delegates from national parliaments and the European Parliament. What is missing in the EU’s current quasi-confederal design is a strong parliamentary check on those decisions that transcend the boundaries of the ordinary legislative procedure (where the Parliament is co-legislator with the Council of the EU).

I understand that such a committee will be separate from the European Parliament’s Economic and Monetary Affairs (ECON) committee, perhaps in an overall redesign that will see ECON being split into at least three committees each with a narrower scope, such as one dealing with macroeconomic issues, another with financial regulation, and a third with economic governance, without prejudice to the possibility of them holding joint committee meetings (Members of the European Parliament can of course be permanent or substitute members of multiple committees).

I would rather see this inter-parliamentary assembly for economic governance convene at the European Parliament at every stage of the European Semester. Meetings would be held during “committee weeks” (weeks when parliamentary committees do their work), with national delegates joining their European colleagues at the new economic governance committee (EGOV or GOVE from French for gouvernance économique).

Where this gets complicated is on producing legislation. There will have to be a new procedure that will enable this inter-parliamentary assembly to co-legislate with the Council. This will not be a mere hearing chamber for holding the Finance Minister accountable. It has to have the power to make laws in line with evolving needs and circumstances. Given that this assembly would also be comprised of national delegates, and would have double legitimation from the national and the Union level, I believe it should have the right to initiate the legislative process (something that the European Parliament lacks). Initiating this process means proposing new laws and setting in motion the process for repealing existing ones.

Given that the powers of the European Finance Minister will not be vertically separated, impacting both the supranational and the national level, accountability cannot only be left to the European Parliament, for that would erode the role of national parliaments on issues that clearly fall within their competences, while providing an advantage to centripetal forces that could shrewdly abuse it with impunity to assert more power at the Union level.

Since we are on the topic, I find the basic claim of the United Kingdom’s government on coalitions of national parliaments being able to block Community legislation, to show them a “red card”, to be a plausible one (only under the assumption that the EU operates as a confederation). For as long as vertical separation is not guaranteed, national parliaments must somehow have a way to remain in control of their own fate.

A process where details matter

Technicalities are of paramount importance when considering such schemes. Depending on the specifics, a European Finance Minister can be anything from a democratically legitimised official to an omnipotent economic overlord.

I believe the policy paper of Henrik Enderlein and Jörg Haas has a sound basis, though I do disagree with its part on the European Monetary Fund. I do, nonetheless, find such proposals to be very interesting and fecund, in that they combine “pragmatism” (a much-abused term) with a certain vision for improving the existing system. Trying to work within the constraints of the actual EU means making compromises on the ideal state of affairs. Still, the substance can be preserved, even if particularities may vary.

I like to think that the ideal should not be the enemy of the good, but rather act as its guide. Any measure that reduces the influence and scope of inter-governmental bargaining, as well as any plan that improves the legitimacy and accountability of the EU architecture, while rationalising its policy instruments, has to be examined in a positive spirit.

That granted and as also discussed in my dialogue on Europe’s sovereignty mismatch, I still perceive of European integration as a process. No single step forward is sufficient in its own capacity. Assuming the EU will continue to be an inter-state formation over the medium-to-long-term, much more will be required to transform it into a constitution-based federal republic.