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Tuesday, 28.04.2015, 03:30
Decisive step for European integration and the Baltics
Main idea of the European Union has been and still is a deeper and more profound integration. Hence, the Commission’s constant efforts aimed at deepening monetary and economic integration, in particular. Thus, in May 2008, in the Commission’s communication marking 10 years of Economic and Monetary Union (see IP/08/716) showed both the need to improve the euro area’s governance and increase coordination of member states’ economic policies.
The Commission acknowledged that these steps would involve both deepening and broadening economic surveillance instruments/measures and, at the same time, would address divergences in growth, inflation and competitiveness.
The June summit is the last EU-27 members’ meeting under the Danish Council’s Presidency; since July its place at the head of the Council of Ministers will take Cyprus.
Fiscal union can end instability
A fiscal union is one of the main building blocks required to ensure smooth functioning of the EU common currency. This new architecture would provide a clear vision of the future of the EU's Economic and Monetary Union, EMU and guide the reforms and decisions necessary for the euro area and its Member States to tackle current challenges.
The debate at the summit is important in the sense that a monetary union would fail unless it develops into a fiscal union. Such a “union” is both necessary and impossible as several EU politicians believe that a fiscal union is utopian. In such a “climate”, investors avoid the bond markets of peripheral Europe. Investors will return only under clarity about euro’s future and economic governance in the EU. Hence, the importance of the fiscal union’s debate at the summit.
The fiscal union can stabilize the EU financial sector only in case that responsibility over all systematically relevant banks is taken by the EU institutions. This would require both EU-level regulations, supervision and a liquid bail-out fund (probably in the sort of Eurobonds). Of course, most of the EU banks are already international by function, but they survive and parish only nationally!
A high-stakes poker game which is going on between central bankers and European politicians has to include a new dimension, i.e. continent’s common future.
It is now accepted by almost all that, to survive, the euro needs a “banking union”, which means that all the banks are subject to the same regulatory provisions. Such a union would involve a eurozone-wide deposit guarantee scheme, a supervisory body to regulate all bloc’s banks and the ability to re-capitalise a failing bank in 17 eurozone-members.
Stability, Coordination & Governance
The Treaty on Stability, Coordination and Governance, commonly known as European Budget Pact, or TSCG, was signed in March 2012 by the Heads of State and Government of 25 EU member states (except the UK and Czech Republic).
To enter into force TSCG needs ratification by 12 states out of 25. Up to the end of June, i.e. 4 months after its adoption, there were 7 ratifications, including referendum in Ireland on 31 May with more than 60% votes in favour; there are only 4 eurozone states that ratified the treaty so far. Among the Baltic States, presently, only Latvian Parliament approved the treaty by 67 in favour and 29 against).
The TSCG’s 16 articles describe its three main issues: budgetary discipline among the EU states, economic policy coordination and euro-zone governance. The treaty’s main aim is “to strengthen the economic and monetary union’s economic pillar”. The EU member states committed to undertake an economic policy “that fosters the good functioning of EMU and promotes economic growth through convergence and competitiveness”.
The treaty enters into force on 1 January 2013, if 12 eurozone members have ratified it. States outside the eurozone can also ratify TSCG and adhere to “all or part” of the budgetary rules that are included in the treaty.
Progress in economic governance
Among considerable efforts in this direction, several particular measures shall be mentioned:
First, the so-called European Semester; the economic crisis revealed a clear need for stronger economic governance and coordination at EU level. This is why, in summer 2010 – in May (see IP/10/561) and June (see IP/10/859), the European Commission proposed the creation of a European Semester to introduce effective ex-ante coordination of fiscal and economic policy plans at European level, before decisions are taken on budgets at national level – in line with both the Stability and Growth Pact and the Europe 2020 Strategy.
governance mechanism was approved by the EU member states on 7 September 2010.
The European Semester started in November 2011 with the Commission’s presentation of the Annual Growth Survey where it set out the priority actions for the EU’s member states in terms of public finances, structural reforms and other growth-enhancing measures. The Annual Growth Survey forms the basis for discussions among Heads of State or Government at the Spring European Council, which sets the economic policy framework for the EU’s member states for the coming year.
Subsequently the member states submit their national reform programs (on economic and employment policies) and stability or convergence programs (on budgetary strategies) to the Commission for assessment. The results of that assessment, against the priority areas defined in the Annual Growth Survey, are the country-specific recommendations that are endorsed by the European Council, as a rule, in June.
Second, the so-called "six pack" laws; it’s a set of EU legislation resulted in a strengthened Stability and Growth Pact. It was proposed by the Commission on 29 September 2010 (see IP/10/1199), approved by Council and EP on 28 September 2011 (see MEMO/11/647) and has entered into force on 12 December 2011 (MEMO/11/898). Comprising five Regulations and one Directive, the six-pack covers fiscal but also macroeconomic surveillance, and provides for sanctions on those euro area’s member states that deviate from the rules.
The Commission admits that these regulations already prove their efficiency as they signify a major milestone in Europe's economic governance and crisis response representing effective tool towards a functional framework to complement monetary union with a real economic union.
The regulatory instruments consist of so-called "2-pack" laws: they are two draft regulations build on the "six-pack" rules by further strengthening the coordination of budgetary policy in the euro area. They were tabled by the Commission already in November 2011(see MEMO/11/822).
The first draft regulation aims to further improve fiscal surveillance by establishing a common timeline and common rules to allow for more active prior and ex ante monitoring and assessment of the budgets in the euro zone member states. These states would be required to submit their draft budgetary plans for the following year to the European Commission and the Eurogroup (made up of Economic and Finance Ministers of the 17 euro area states) in October 2012, along with the independent macro-economic forecasts on which they are based. This will allow the Commission to issue an opinion on such draft budgetary plans which will feed into the national budgetary debate, notably concerning the appropriate implementation of EU policy guidance. In case a plan seriously breaches the EU fiscal rules, the Commission will ask the state in question to present a revised draft of its budgetary plan. This builds on the Stability and Growth Pact, under which all EU member states present the main features of their medium-term public finance plans to the Commission and the Council.
The second draft regulation aims to improve surveillance of the most financially vulnerable euro area member states.
The "2-pack" is currently being scrutinised by both the European Parliament and the Council of Ministers. The Commission is working towards a fast approval of an ambitious version of its draft laws.
In November 2011, the Commission presented, together with the two-pack, a Green Paper on "the feasibility of introducing Stability Bonds" (see MEMO/11/820) to structure the political debate in the EU on the rationale, pre-conditions and possible options of financing public debt through European Stability Bonds.
Such common issuance of bonds by the euro-area states would imply a significant deepening of Economic and Monetary Union. It would create new means through which governments finance their debt, by offering safe and liquid investment opportunities for savers and financial institutions and by setting up a euro-area wide integrated bond market that matches with the US in terms of size and liquidity. The fiscal framework underlying EMU would similarly undergo a substantial change, as Stability Bonds would need to be accompanied by closer and stricter fiscal surveillance to ensure budgetary discipline.
The Green Paper on Stability Bonds needs to be followed up with a roadmap that outlines the necessary deeper fiscal and economic integration in order to minimise moral hazard and ensure fiscal sustainability, in other words, the features of an economic and political union required discussion at the summit.
The EU institutions have already taken unprecedented steps to strengthen coordination of economic and fiscal policies in the Union. They have been accompanied by an expression of solidarity to support financially vulnerable euro area countries through the building-up of the euro area's firepower in the form of the EFSF, and the ESM (which should be effective this July). The renewed intensification of the sovereign debt crisis demonstrates the need to build further on these achievements, and map out the main steps towards full economic union, to complement and strengthen the existing economic and monetary union, as the European Commission has advocated and implemented in the past years. A fully-fledged economic union would require more decisions taken at European level when it comes to public expenditure, revenues and borrowing, and thereby a higher degree of political integration. This should obviously entail commensurate steps that ensure democratic legitimacy and accountability.
Reference: Press Release, MEMO/12/483, 25 June 2012