Rhein on Energy and Climate

I report on the single most important event of the past few weeks: the meeting of the European Council October 28/29th, which was almost completely devoted to the hot issue of European economic governance.

Ignoring the nasty haggling and mounting suspicions caused by the “Deauville” Franco-German “accord” the European Council has substantially advanced the debate on the future economic governance. But many open questions remain and will not find a solution until 2013.

There is agreement on two key elements: the need for a stricter Stability and Growth Pact to reduce the excessively high levels of public debt and new budget deficits and the need for a permanent crisis mechanism to help countries (à la Greece) in financial crisis from which they cannot disentangle themselves without external assistance.

The revised Stability and Growth Pact should be approved by EP and Council before the summer of 2011, on the basis of the formal proposal submitted by the Commission, which converges largely with the recommendations of the Van Rompuy Group, whose conclusions the European Council has endorsed at its last meeting.

The revised Pact should function better because of several amendments:

A more systematic surveillance by the Commission of emerging macro-economic imbalances (productivity, wages, property bubbles or current account surplus/deficit situations, followed by appropriate Commission/Council recommendations. The Commission will prepare an annual report on the issues.

Broadening, acceleration, and tightening of the deficit procedures. In future it will be possible to introduce an infraction procedure in case of excessive public debt levels only. Shorter delays for Commission recommendations and strict delays within which the Ecofin Council will have to decide will put pressure on the system. The procedure will become less political as the Commission recommendation is deemed adopted unless reversed by the Council with a qualified majority (reverse majority). Last not least, tougher penalties (financial deposits), differentiated between Euro zone members and non-members.

It is the Permanent Crisis Mechanism that creates the biggest political and substantive problems.

There is now agreement on the need for a permanent crisis mechanism. The present European Financial Stability Mechanism, endowed with € 440, will expire in 2013, and Germany is not prepared to extend it without a Treaty amendment, because of fears about the German Constitutional Court banning further financial assistance as incompatible with the Treaty.

The European Council has “bought” the German argument and accepted a simplified Treaty revision. This requires a unanimous decision by the European Council to be ratified by all member countries (Art. 48).

Most likely, this revision will provide for financial assistance to individual member countries in exceptional circumstances endangering the Euro (Art. 122).

In the coming weeks the Commission will make suggestions on the precise content of the revision. At its December meeting the European Council intends to formally launch the Treaty revision, after Van Rompuy will have toured all capitals. The decision is urgent considering the need to complete the ratification procedure before 2014 latest.

What I have set out in a few paragraphs is fraught with questions and obstacles:

Is the EU well advised to focus so much on the permanent crisis mechanism, instead of getting the budgets straight?

Will the participation of the private banks in crisis settlements that Germany asks for, create insecurity in financial markets?

Will a permanent crisis mechanism offer “moral hazard” to both governments and financial markets?

Would the deprivation of voting rights, demanded by Germany but opposed by almost all member states, be compatible with the treaty, regardless of Art? 7?

Will the stricter procedures of the Stability and Growth Pact really have the clout to enforce the much higher fiscal stability needed?

The debate in the coming months will be exciting and overdue. The crisis has shown that EU member countries cannot continue doing business as usual. Mentalities have already changed dramatically. Sacrifices that were unthinkable a year ago pass without mass demonstrations.

The EU has no choice but to consolidate its budgets and reduce public debt dramatically in view of preparing for progressively rising expenditures for old age pensions and heath care, due to ageing.

Governments should therefore use the opportunity offered by the EU framework to abstain from tax presents to win voter preference: Germany has done so bilaterally by a constitutional amendment making zero deficits mandatory. The revised EU Stability Growth Pact might become a pale reflection of the German approach.

Brussels 02.11.10 Eberhard Rhein

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