February 15, 2011
Before the end of March the EU heads of government are scheduled to make the European Financial Stabilisation Fund (EFSF) “water-proof” by raising its intervention capacity beyond the present € 440 billion. This is likely to happen through additional guarantees from the few EU countries enjoying an AAA rating and additional payments from non-AAA countries.
Germany as the biggest EU country will have to pay or guarantee the biggest absolute amount, though proportionally no more than any other Euro-country. German public opinion has been anything but fond of raising the Fund’s intervention capacity. This is the main reason that has induced Ms. Merkel to make its assent conditional and obtain concessions on stricter economic and fiscal discipline within the Euro-zone.
Her six-point plan, entitled “competitiveness pact”, has in fact little to do with raising the the Euro-zone’s competitiveness, but a lot with removing lax or unsustainable elements of economic policy in several Euro-zone countries.
Germany has introduced a “constitutional brake” for future budget deficits. As of 2016 the federal government will no longer be able to run budget deficits. This is a wise provision in view of steadily rising public debt levels and charges resulting from ageing populations.
Germany would like all Euro-zone countries to introduce similar constitutional brakes, as a precautionary measure against unsustainable public debt.
Unsustainable debt levels that have been a major cause of the financial crisis in Greece. levels that have been a major cause of the financial crisis in Greece. Such a measure makes a lot of sense. France is about to introduce its version, allowing a three percent budget deficits, in line with the Maastricht criteria. Sooner or later all Euro-countries will have to introduce some sort of constitutional brake against excessive deficits.
In line with long-term budget consolidation, Germany has decided to raise the legal retirement age to 67 years by 2026. This decision continues to be controversial, though perfectly in line with rising life expectancies in all European countries. Germany wants all EU countries to follow suit. That process is under way, as the recent deal in Spain shows. It is overdue, because it helps lowering old-age insurance charges and improving Europe’s competitiveness against emerging countries that enjoy a more favourable age structure and much lower social charges.
Ms. Merkel may therefore have done a service to Europe by putting pressure on her colleagues for obtaining a political commitment from all heads of government to raise retirement ages. In order to encourage qualified personnel to find more easily jobs across the Union, Ms. Merkel calls for mutual recognition of diplomas and educational qualifications. This is something long overdue; and one wonders why the Commission has not invested more energy to make some headway.
Heads of state should therefore invite their education ministers to come up with solutions to be implemented during the next five years. The impact on the overall competitiveness of the EU will be modest. Still, it might turn out as symbolic act underlining the importance more intensive cross-fertilisation among Europe’s huge basket of talents.
Ms. Merkel seems afraid that the practice of some member countries linking wages to inflation indexes might lead to wages running ahead of productivity and thereby undermining a country’s competitiveness. That is why she recommends abolishing such systems, which have a long standing in countries like France or Belgium. Her fear seems exaggerated. Countries with wage indexation have proved their ability to keep their wage developments under control, especially if the wage indexation only concerns the minimum wage. It is therefore unlikely that the EU will agree to abolish this practice in any near future
Her proposal for member countries to establish national crisis plans for banks is already under discussion within the EU and should not pose any problems. But its relation to competitiveness is at best indirect. Her most controversial suggestion concerns the coordination of corporate income taxation. Both the basis for taxation and even more the tax rates vary widely among EU member countries. Ireland, Slovakia, Estonia,Cyprus and Luxembourg have systematically used low tax rates to attract foreign direct investments. Basically there is nothing wrong with that, though countries with much higher tax rates like France or Germany take issue with Ireland “subsidising” foreign direct investments while having to be bailed out by them. Differences in corporate income tax rates have little to do with competitiveness; moreover the EU decides on tax issues by unanimity. One might optimistically hope for no more than a harmonisation of the tax bases. But even that is not the first of priorities in the next few years.
Whatever the motives or the title of Merkel` s initiative, it will give a boost towards more European economic governance and the strengthening of the Euro-zone as a vanguard for European integration. It will help to raise awareness in the EU about the need for complementing the monetary union by much closer coordination of economic policies. Germany has been very long dead-against anything smacking of economic governance or separating the Euro-zone from the other member countries. But in the short- term, not much will survive of her six-point plan for raising competitiveness.Author : Eberhard Rhein