EU fiscal policy

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

Raising the retirement age and cutting back pension entitlements are possibly the most unpopular measures that any modern European government can take for the purpose of stabilising the public finances.  From an individual’s point of view, the advantages seem remote or non-existent and the disadvantages all too immediate.  From the point of view of a ruling political party seeking re-election, it’s much the same story.  This explains why there is growing interest among European Union policymakers in the idea of “de-politicising” the pensions issue, by making certain changes to pension systems automatic and not subject to endless, acrimonious political struggles.

Take a Green Paper published today by the European Commission.  A Green Paper is a document designed to stimulate public discussion, not make firm policy proposals, so the Commission steers a cautious path through the issues.  Nonetheless, it observes in one passage: “A number of member-states have demonstrated that a promising policy option for strengthening the sustainability of pension systems is an automatic adjustment that increases the pensionable age in line with future gains in life expectancy.” Read more

Financial commentators, like financial markets, move in herds.  Is the herd wrong about Greece?

The herd takes the view that Greece will sooner or later have to restructure its debt.  According to herd thinking, the €110bn rescue plan arranged for Greece by its eurozone partners and the International Monetary Fund merely buys some time for the Greek government – and for its European bank creditors.  The herd predicts a “haircut”, or loss, for Greek bondholders of 30 to 50 per cent of the face value of their bonds.  All this is likely to happen towards the end of 2011 or in early 2012, says the herd. Read more

There is a gulf separating Germany from France on how to cure the eurozone’s ills, and it does not bode well.

Germany identifies the eurozone’s chief problems as excessive budget deficits, weak fiscal rules and a general culture of over-spending in the region’s weaker countries.  The remedy, say the Germans, lies in austerity measures, tougher punishments for rule-breakers and better housekeeping.  Germany is so sure that it has got the answer right that it is introducing a €80bn programme of tax increases and spending cuts – not because the German economy desperately needs such measures, but because the government in Berlin wants to set an example to other eurozone states.

France knows the eurozone has a fiscal problem, but it disagrees with the German view that immediate and drastic austerity measures are essential.  The French contend that, if budget hawks win the day, Europe’s fragile economic recovery will fade away and there may even be another recession (as Paul Krugman notes, an example often cited in support of this argument is the “Roosevelt recession” of 1937, when President Franklin D. Roosevelt, having just about dragged the US economy out of the Great Depression, inadvertently caused another economic downturn with a premature attempt to balance the budget). Read more

Slowly, too slowly perhaps, the eurozone is delivering its response to the collapse of market confidence triggered by the European sovereign debt crisis.  An important step appears likely to be taken at a finance ministers’ meeting in Luxembourg on Monday.  They are set to agree the terms on which a Special Purpose Vehicle will be able to borrow up to €440bn on the markets to help a eurozone member-state that is experiencing borrowing difficulties.

On the face of things, this initiative goes considerably further than the €110bn rescue package arranged last month for Greece. The Greek aid is based on bilateral loans from other governments in the 16-nation eurozone. But the SPV will be a self-contained entity, operating under Luxembourg law, that will issue bonds backed by member-state guarantees.

You could almost call them “common eurozone bonds” – except that, for political reasons, this is an all but unmentionable term.  Opposition to common eurozone bonds is exceptionally strong in Germany, where the prevailing view is that such a measure would simply benefit wastrels like Greece and impose higher borrowing costs on countries that practise fiscal discipline – i.e., Germany itself.  Nonetheless, the German government has taken an energetic role in designing the structure of the SPV.  It is a big moment for Germany and one which shows that the German commitment to making a success of European monetary union is not to be underestimated. Read more

The first 11 years of the euro have exposed several flaws in the design of Europe’s monetary union.  One is the fact that, contrary to expectations, the experience of sharing a common currency with advanced, northern European economies did not spur but held back structural reform in weaker, southern member-states.  Another was the ineffectiveness of the stability and growth pact, the eurozone’s so-called fiscal rulebook.  In a nutshell, too many governments ran up large budget deficits and didn’t bother to cut public debt when they felt like it – and this, by the way, includes Germany, the self-styled paragon of fiscal discipline, under former chancellor Gerhard Schröder. Read more

The €500bn eurozone stabilisation package agreed in the early hours of Monday, to be topped up by as much as €250bn from the International Monetary Fund, represents the first time since the Greek debt crisis erupted in October that European political leaders have moved decisively ”ahead of the curve”.  All along, the only way of calming financial markets was to produce an initiative that would exceed their expectations and convince them that Europe would do whatever was necessary to save its monetary union. Read more

The financial rescue plan devised by eurozone governments for Greece doesn’t look like a rescue plan in the classic sense.  Like a thermonuclear weapon, it appears intended never to be used at all.  The idea is that the Greek government itself, backed by calmer financial markets, will succeed in overcoming its debt crisis without ever drawing on assistance from its 15 euro area partners. Read more

A couple of months ago, some European Union policymakers talked despairingly of how 2009 risked turning out to be “a wasted year”.  Now the EU is on a roll.  The impasse over José Manuel Barroso’s reappointment as European Commission president was removed last month when the European parliament stopped playing games and renewed his term of office.

And all of a sudden, it looks as if “a decade of deadening debate over the European Union’s institutional shape” – as British foreign secretary David Miliband puts it in today’s FT – will soon come to an end, after Ireland’s referendum on the Lisbon treaty produced a massive majority in favour.  It may not be long before the EU has its first full-time president, a new head of foreign policy and a new Commission with a five-year mandate serving under Barroso. Read more