ANALYSIS:The latest proposals from Brussels to flameproof the euro are likely to be political dynamite for many member states
ONLY THREE days after EU leaders pledged to create a supersized bailout fund for distressed euro countries, the European Commission wants all governments who use the single currency to send draft budgets for review in Brussels before they unveil them in parliament. Dispute is inevitable.
In terms of logic, the commission’s idea makes perfect sense. The inherent weakness in the euro’s control system fanned a dangerous build-up of debt and deception in Greece. An outbreak of Greek contagion quickly threatened the viability of the currency when markets took fright at the fiscal weakness of Spain and Portugal, whose austerity plans are some way behind Ireland’s.
In real-time politics, however, the commission’s measures are dynamite. The plan would thrust huge swathes of economic power towards Brussels from capitals, embroiling all euro countries in each other’s affairs as never before.
European governments will have to decide how far down this path they wish to travel. Given the depth of likely resistance, the commission is perceived to have played a maximum hand in anticipation of pressure to pull pack. And the plans are very far-reaching. Minister for Finance Brian Lenihan could be asked to revise his draft budget if his counterparts in the euro group of finance ministers felt he was borrowing too heavily, not cutting back fast enough or not putting aside enough cash when times were good.
If economic policy is the ultimate expression of sovereignty, opening the budget to external scrutiny before it goes to parliament marks a drastic dilution of local prerogatives. In the intense firmament of national politics throughout Europe, this is bound to be cast as an improper intrusion in domestic concerns.
No government likes others meddling in its business. French finance minister Christine Lagarde displeased German chancellor Angela Merkel two months ago when she urged Berlin to boost domestic consumption and reduce reliance on exports. Germany and France are all for closer economic supervision, but not of their own finances.
It is more or less the same for everyone. If the perennial tension between fiscal consolidation and stimulus dominates economic debate in recessionary times, seeking agreement across borders as to where the balance should be struck is fraught with potential for strife.
But commission president José Manuel Barroso and his economics chief Olli Rehn say there is good reason to ramp up surveillance and co-ordination. Given rampant fiscal undiscipline throughout the euro zone and sky-high public indebtedness, they say the time has now come to introduce “spine and rigour” into the control mechanisms that underpin the single currency.
Rehn doesn’t want a line-by-line examination of budgets, saying budgetary guidelines and the fiscal balance would be scrutinised. With almost all euro governments borrowing heavily, the aim is to compel them to ruthlessly cut their debt. Although street protests in Dublin never turned violent like in Athens, they illustrate public anger is inevitable when the government takes the knife to spending. Still, Barroso argues the case for surveillance is all the stronger after euro countries agreed to provide a €440 billion guarantee to the new bailout fund and promised to lend €80 billion to Greece.
“I think now we have the conditions to do it, because it really must be done now,” he told reporters in Brussels yesterday. “Europe has been dealing with an immediate emergency, but we must also show we are serious about the more fundamental reforms needed. We must now get to the root of the problem.”
The plan would create a “European semester” for policy co-ordination, meaning all countries’ policies would be examined within a common surveillance cycle. At its root is the basic assumption “prevention is more effective than correction.” This means the introduction of ex-ante policy surveillance, a new system of “early peer review” by the commission and ministers from other countries, and an examination of proposed national policies in the light of their possible impact on the wider euro system’s stability.
“The currently missing ex-ante dimension of budgetary and economic surveillance would allow the formulation of genuine guidance, taking into account the European dimension, and their subsequent translation into domestic policymaking,” it said.
Early peer-review would provide “guidance” for the preparation of national budgets the following year. While Barroso said this would foster transparency, national parliaments and law-makers are unlikely to see it his way.
There is more. “Special consideration to the aggregate stance should be given in the cases of serious economic stress in the euro area, when sizeable fiscal policy measures taken by individual member states are likely to produce important spill-overs,” said the commission. “In the case of obvious inadequacies in the budget plans for the following years, a revision of the plans could be recommended. The euro group should have a crucial role to play in this new system of enhanced co-ordination and, where appropriate, have recourse to formal decision-making as provided by the Lisbon Treaty.”
This is a reference to article 136, which empowers the authorities to take “measures specific” to member states. Such measures can be used “to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the union and are kept under surveillance”. They can also be used to “strengthen the co-ordination and surveillance” of budgetary discipline.
Article 136 gives ministers the right to vote on these matters by qualified majority, meaning no minister has a veto over a decision of the wider group. Implicit in the proposal is recognition that toothless surveillance has only magnified the problems of the euro. When EU leaders decided to go for broke last weekend by creating a mammoth rescue fund, the message was the foundations of the euro were under threat.
The message from Barroso is that this move was but the first part of a new grand bargain, the second part being deeper co-ordination in return for hundreds of billions worth of solidarity. “Member states should have the courage to say whether they want an economic union because they don’t want that, it’s better to forget monetary union altogether.” It’s a fundamentalist argument.
The counter-argument will be too.
Arthur Beesley is Europe Correspondent, based in Brussels