Economic governance

Barroso, left, and Verhofstadt

Fellow Brussels Blogger Josh Chaffin has a fun piece in today’s paper on MEP Guy Verhofstadt, the former Belgian prime minister who has moved into a central role in the suddenly intensifying negotiations over the so-called “Six Pack” – the six legislative measures that would give the EU the power to fine member states that don’t get their fiscal houses in order.

In the story, Josh quotes a 2004 US diplomatic cable we obtained through WikiLeaks where Pat Cox, then the European parliament president, gave Rockwell Schnable, the US ambassador to the EU, a run-down on how Verhofstadt was handling losing the European Commission presidency to José Manuel Barroso. As we said in the story, Cox said Verhofstadt was “devastated”.

As we frequently do here at the Brussels Blog, we thought we’d give readers a bit more on the cable. After the jump, we’ve included the entire section where Cox talks about Verhofstadt. It’s an interesting read.  Read more

Reforming the management of economic policy, primarily in the eurozone but also in the European Union as a whole, is without question one of Europe’s highest priorities.  Few steps would do more to raise the EU’s credibility with the US, China and the rest of the world than concerted action to improve European economic performance and make the euro area function more efficiently as a unit.  Much of this comes under the heading of “economic governance”. But the difficulty is that it is not always easy to figure out which Europeans are in charge of the process.

On Monday Herman Van Rompuy, the EU’s full-time president, chaired the latest meeting of a task force on economic governance that he was chosen last March to lead.  The task force, consisting largely of EU finance ministers, came up with various sensible ideas on tightening sanctions (financial and non-financial) on countries that break European fiscal rules.  Task force members also want to strengthen the monitoring of macroeconomic imbalances, such as the gap between large current account surpluses in Germany and deficits in southern Europe. Read more

The European Union’s fiscal rulebook, known as the stability and growth pact, has fallen into such discredit since the euro’s launch in 1999 that almost any change is likely to be an improvement.  But are the reforms that EU finance ministers agreed in Luxembourg on Monday good enough?  I have my doubts.

There are many flaws in the stability pact, but the essential problem is enforcement.  How can outsiders compel a government, with sovereign control of its budget, to observe fiscal discipline?  The pact contains a provision for imposing fines on countries that run up high budget deficits and ignore recommendations from other member-states and the European Commission to take corrective measures.  Predictably, however, no country has ever paid a fine or has even been asked to pay a fine throughout the euro’s 11-year history.  Governments have shrunk from punishing other governments because they know that the tables may one day be turned on themselves.

In any case, it has always seemed potty to slap fines on a country with a large deficit.  The penalties would simply exacerbate the country’s budgetary difficulties.  No wonder Romano Prodi, the former Commission president, once called the stability pact “stupid”. Read more