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THE MESSYREBUILDING OF EUROPE
bruegel
policy brief 
ISSUE
2012/
01
MARCH 2012
by
Jean Pisani-Ferry
Director of Bruegel
 jean.pisani-ferry@bruegel.org
André Sapir
Senior Fellow at Bruegel
andre.sapir@bruegel.org
and
Guntram B. Wolff 
Deputy Director of Bruegel
 guntram.wolff@bruegel.org
POLICY CHALLENGE
It is too early to determine if and how policy integration within the euroarea will develop beyond its current limited monetary and budgetary remit.Alternative scenarios can be envisaged, from the building of a coherenteuro area within the EU, to a fragmentation of the financial market and ageneralised ‘variable geometry’. Policy action should be based on the needto (a) make room for deeper integration within the euro area, beyond thelimited remit envisaged in the Lisbon treaty; (b) preserve the integrity of the EU27 and its essential gover-nance arrangements; (c) ensureequal treatment in the applicationof common rules; (d) ensure thatcandidates for euro-area member-ship have a voice in the definitionof its rules; and (e) balance therequirements of legal clarity,accountability and efficiency withthe desirability of experimenta-tion through variable geometry.
Overlapping and complex governance
THE ISSUE
The euro crisis and subsequent policy responses havechallenged the assumptions underpinning the governance of the euro area,and the relationship between the European Union’s euro- and non-eurocountries. The euro policy regime has become increasingly complex anddifficult to manage, raising the question of the accountability of decisionmaking to citizens. Complexity also threatens to create frustration for euro-area members, which fear that initiatives to strengthen the euro will behindered, and for non-euro members, which fear that they will be
de-facto
deprived of their say in decisions of major relevance to them.
Source: Bruegel.
EU27Euroarea
Treaty on Stability,Coordination andGovernance(‘Fiscal Compact’)
 
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02
THE MESSY REBUILDING OF EUROPE
1. This Policy Brief is anedited version of apaper prepared for theinformal ECOFIN of 30March 2012 at theinvitation of the DanishPresidency of the EUCouncil.
THE EURO CRISISand the way poli-cymakers have responded havechallenged the assumptionsunderpinning the euro-area's gov-ernance, and the relationshipbetween the European Union'seuro- and non-euro countries. Asmore steps are taken in responseto the weaknesses in the europolicy regime revealed by thecrisis, the EU will face new chal-lenges of the same sort. This PolicyBrief provides input to the policydiscussion on the governance of the EU/euro area relationship
1
.The governance model of whatcould be called EMU 1.0 wasbased on three assumptions:first, that Economic and MonetaryUnion only required, in addition toEU single market provisions, dele-gation of monetary policy to thecommon central bank and theavoidance of excessive budgetdeficits; second, that governancecould be grounded on rules-basedprevention only, and that therewas no need for crisis manage-ment; third, that all EU countrieswould eventually join EMU (atleast those without a waiver).These assumptions made thegovernance of the EU/euro arearelationship relatively simple.Euro-area relevant provisionscould be designed as a self-con-tained set of rules applicable toeuro members, and those rulesinterfered minimally with the gen-eral rules applicable to all EUmembers. Single market integra-tion was seen as contributing tothe strengthening of the euro,while being beneficial to all. Gov-ernance could rely on themachinery of the Economic andFinancial Affairs Council (ECOFIN)for the implementation of formalrules, while the Eurogroup, con-sisting of the finance ministers of euro-area countries – a late addi-tion to the governance framework– limited itself to the monitoringof economic developments andthe preparation of ECOFIN deci-sions relating to the ExcessiveDeficit Procedure.This barebones EMU failed thetest posed by the crisis. It is nowrecognised that a sustainable cur-rency union requires moregovernance because of the higherdegree of economic, financial andfiscal spillovers than those exist-ing outside the currency union:Beyond strengthening of budg-etary discipline, decisionssince 2009 include the cre-ation of a crisis managementand resolution mechanism;prevention initiatives in fieldssuch as competitiveness andits determinants, macroeco-nomic imbalances, andfinancial stability; and thegradual build-up of a hands-oneuro governance structurethat functions in a markedlymore discretionary way thanbefore the crisis. Further dis-cussions suggest that thestrengthening of the euro areacould eventually have otherconsequences such as accessto specific budgetaryresources, banking regulationand supervision, public-debtmanagement and politicalunion. These developments areblurring the previously cleardistinction between euro-areaand EU management.The crisis has led to a recogni-tion that for individualcountries, participation in thesingle currency is moredemanding than initially per-ceived. Although all but two of the EU27 are formally commit-ted to joining the euro, there isagreement that the economicpreconditions for successfulparticipation must be metbefore the irrevocable lockingof exchange rates. This opensup the possibility that thecoexistence between euro-area members and a relativelylarge group of non-euro EUmembers will last for longerthan initially assumed.The Eurogroup has increas-ingly assumed the role of a
de-facto
executive body.Two other factors make the dis-cussion about the relationshipbetween EU and euro-area gover-nance difficult. First, thesegroupings are not stable, and thisresults in differences in attitudes:non-euro countries that do notintend to join in the near futureare primarily interested in limitingspillover effects from euro-areadecisions onto the wider EU, whilecountries that want to join theeuro are concerned to avoid a sit-uation in which it becomesincreasingly difficult to join amore deeply integrated euro area.Second, the two categories of country are not homogeneouslegally, economically and politi-cally. Even among the current 17euro-area members, there are sig-nificant differences that implydifferent appetites for integration.These two factors make it difficultto rely on the basic rule that allrules for EU/euro-area relation-ship should simply be defined byall EU countries together.Until now, the EU has dealt prag-matically with this complexity.
 
THE MESSY REBUILDING OF EUROPE
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03
2. Article 136 of theconsolidated Treaty onthe Functioning of theEuropean Union (TFEU).3. Article 137 of theTFEU.4. A set of five regula-tions and one directivedealing with economicand fiscal surveillancethat entered into forceat the end of 2011. Seehttp://ec.europa.eu/economy_finance/articles/governance/2012-03-14_six_pack_en.htm.
The basic governance model hasbeen retained while new compo-nents have been added either ateuro-area level (for example theEuropean Stability Mechanism),at EU level (for example the Euro-pean Semester), or in
ad-hoc
formats (as for the Euro Plus Pactor the Treaty on Stability, Coordi-nation and Governance (TSCG)).As a consequence, the decision-making system has been mademore complex and difficult tomanage, bringing into question itsperception by, and accountabilityto, citizens. Complexity could alsocreate frustration among botheuro- and non-euro members.Euro-area members fear that ini-tiatives deemed essential forstrengthening the euro will be hin-dered by excessive governancecomplexity resulting from thedemands of non-euro members,who fear in turn that they will be
de facto
deprived from havingtheir say in decisions of major rel-evance to them.RECENT DEVELOPMENTS IN GOV-ERNANCE AND CONSEQUENCESFOR THE EURO AREA/NON-EUROAREA RELATIONSHIPPre-crisis governance distin-guished between euro-areacountries and non-euro areacountries. ECOFIN plays a centralrole in EU economic decisionmaking. A number of decisionsrelated to the euro area can, how-ever, be taken by the ECOFIN withonly euro-area countries voting.Indeed, the Lisbon Treaty estab-lished a stronger role foreuro-area countries in preparingand finalising recommendationsand decisions on budgetary disci-pline and broad economic policyguidelines
2
. The Stability andGrowth Pact (SGP) in principleapplies to all 27 EU memberstates. However, sanctions areforeseen only for the euro-areamember states. Moreover, onlyeuro-area countries can vote onExcessive Deficit Procedure stepsthat involve only euro-area coun-tries. The Eurogroup was given atreaty-based role by the LisbonTreaty
3
. However, formal deci-sions can only be taken byECOFIN, and the Eurogroup istherefore the forum for deeperdiscussions among euro-areafinance ministers, for example onmatters related to the implemen-tation of the SGP.The first governance reforms toaddress the weaknesses laid bareby the crisis stayed within theTreaty’s remits and implicitlydeepened the legal and institu-tional gap between euro-area andnon-euro area countries. Most of the so-called Six-Pack reforms
4
are based on the Lisbon Treatyand therefore perpetuate the cleardistinction between euro-areaand non-euro area countries. Inparticular, regulation 1175/2011on the strengthening of the sur-veillance of budgetary positionsapplies to the EU27, but the asso-ciated sanctions refer to the euroarea. Regulation 1176/2011 onthe prevention and correction of macroeconomic imbalances alsoapplies to the whole EU. However,the alert mechanism, which ispart of the regulation, is, in accor-dance with Article 121(3) of theTFEU, discussed in the Eurogroupfor the euro-area countries. Also,the so-called Scoreboard, whichforms the basis of the alert mech-anism, distinguishes betweeneuro-area and non-euro areacountries. Finally, the enforce-ment mechanism to correctexcessive macroeconomic imbal-ances adopted as part of the SixPack is exclusively addressed toeuro-area countries (Regulation1174/2011). For the most part,the regulations require qualifiedmajority voting (QMV) by theCouncil to adopt a European Com-mission recommendation. Foreuro-area countries, only euro-area countries vote. Overall, theSix Pack strengthened euro-areagovernance, and by doing so, thelegislation increased the gapbetween euro-area and non-euroarea countries. Indeed, strongerand more binding rules for euro-area countries imply a wider legalgap and may also result in diverg-ing economic policy stances.The Treaty on Stability, Coordina-tion and Governance (TSCG)marks a significant change to thegovernance of the EU, andexposes the growing tensionbetween national sovereigntyand supra-national logic. The newtreaty has two main elements.Articles 3-8 cover the so-calledFiscal Compact, which requiresthe main elements of the SGP tobe transposed into national legis-lation at a constitutional orequivalent level. The correctnessof the transposition into nationallaw can be challenged in the EUCourt of Justice (ECJ). At thesame time, national parliamen-tary prerogatives are safe-guarded. This implies that ulti-mately, the ECJ may have to judgeif a transposition into national lawof the TSCG provisions concerningthe fiscal Correction Mechanism– while not in line with therequirements – may neverthelessbe lawful, because the national

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