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Too Much Trust in EU Institutions

9. January 2014, von Adriaan Schout, Comments (0)

The general impression is that the EMU zone (which gathers countries belonging to, or potentially belonging to, the euro) suffers from a crisis of trust. How can we move forward with European integration when people lack trust in EU institutions? The facts may however be quite different: there is too much trust in the EU institutions and too much trust in the reform capacities in the EMU countries.

The guiding rule for EU-leaders has been to restore trust in the EMU and to get economic growth in the EU back on track. Many steps are being taken to rebuild trust ranging from fiscal compact and banking union, to measures to increase the relevance of subsidiarity. Overall, these measures and the fight for trust will – optimistically – lead to deeper integration.

However, the EMU zone may not suffer from a lack of trust. Paradoxically, this is bad news. First of all, there is generally more trust in EU institutions than in national institutions. Over the past few weeks, I sat in meetings with senior officials and politicians from different parts of the EU. On the question whether they would like to see the EU institutions take over economic tasks and develop into an EU economic government, the answer was decidedly ‘yes’. According to the responses, national institutions (including central banks), have been the cause of the economic and banking problems.

This trust in EU institutions is in accordance with the Eurobarometer which indicates that the people in 17 euro countries have (much) more trust in EU institutions than in their national governments. The bottom of the list with trust in national governments shows euro countries Spain (8% trust national government), Greece (9%), Slovenia (10%), Portugal (10%) and Italy (11%). Other countries with low national trust and higher trust in EU institutions include France (only 24% trust national government) and Ireland (18%).

The consequence of this situation is that there is not so much a lack of trust in the EU (and the related euro institutions) but a national trust crisis – and EU institutions are trusted to manage national economies. If the discussions of the past week are anything to go by, there is a majority of countries in the EU that would like to see the development of stronger European economic governance because they are themselves too weak to run their own economies. In the words of a minister from a country preparing for joining the euro: “the Commission can better decide what is good for us”.

The second reason why there is not a lack of trust in EU institutions is that the EU seems to suffer from traditional over-optimism. Judging by the hope that the EU is better in taking economic governance decisions than national governments closer to their voters, this over-optimism still exists. Greece, Portugal and East European countries were allowed into the EEC/EU. Similarly, accession into Schengen also proved quite easy. Membership was assumed to lead to reforms. In the same vein, despite an argument between monetarist and economic governance economists, euro membership was granted ahead of economic reforms, trusting that membership would do the trick. Hence, the EU has been gambling with economic history based on naïve trust in EU reform mechanisms.

Thirdly, countries have been trusted to be flexible and to develop. However, the French competitiveness index fell from 15th position in 2000 to 22nd in 2013. Italy’s competitiveness eroded as underlined by the drop from 24th position to 49th. Greece managed a slight but hugely painful improvement from 33rd to the 31st position.

Deeper integration is on the agenda. The EU Council meeting of December 2013 concluded additional steps towards banking union and economic contracts. The basis of the economic governance, however, remains a collection of mostly week states; states that seem to have given up managing their own economies and that place their hope in the EU. The EU might as well be doomed with this trust in the EU to solve national reform problems.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

A Not-So-Surprising Accession

9. January 2014, von Alexandre Abreu, Comments (0)

On January 1st, 2014, the day on which the euro had its 15th birthday, Latvia became the 18th member of the eurozone. This accession was prepared over many years and Lithuania is scheduled to follow in 2015, but still this will have come as a surprise to many. Given the predicaments to which eurozone members, and especially the more peripheral and economically-fragile ones, have been subjected to in the last few years, one would imagine eurozone exits to be more likely than eurozone accessions. And yet here we have Latvia proving just the opposite. So what are we to make of all this?

Let us begin by rewinding the tape a few years. Latvia was hit by a severe financial crisis in 2008, as a consequence of the bursting of a credit bubble. In its core, the mechanism was not dissimilar from those which affected most crisis-ridden countries of the eurozone periphery: an inadequate exchange rate (in the case of the Latvian lats, due to its peg to the euro since 2005) giving rise to a mismatch between external economic competitiveness and financial-market inflows and a gradually inflating bubble leading to an inevitable bust triggered by the Global Financial Crisis.

Like the crisis-ridden countries of the eurozone periphery, Latvia requested, and was given, a bailout package (worth €7.5Bn) by the EC-ECB-IMF troika. Quite unlike the peripheral eurozone countries, however, Latvia did have a significant margin to choose between two alternative courses of action when it came to responding to the crisis: given that it had not actually adopted the euro, but merely pegged its currency to it, the choice between internal and external devaluation was a real one. Thus, the Latvian government of the time could perfectly well have abandoned the ERM II mechanism, devalued the lats, undertaken external stabilisation in a way which ensured that the cost of adjustment was borne by the whole of society, and subsequently pursued counter-cyclical fiscal policies. Instead, it chose internal devaluation: keeping the peg and having the overwhelming cost of adjustment be borne by workers through the reduction of ‘labour costs’. The class dimension of this choice is not difficult to see: between having everyone pay (through devaluation-induced inflation) and having workers and the popular classes pay (through wage cuts and austerity measures such as school and hospital closures), the Latvian government chose the latter. And it did so with more than a little cynicism, by attempting to suggest that this choice was made out of social considerations.

Now, we cannot say for sure what would have happened had Latvia made the alternative choice. What we do know, however, is what the selected course of action brought about: a 24% drop in GDP, including a drop by 17.7% in 2009 alone; an increase in unemployment from 8% to 18% in 2008-2009; and the emigration of about one-tenth of the labour force. What the ‘austeritarian’ camp hails as one of its greatest success stories (because of the subsequent recovery: 5.5% in 2011, 5.6% in 2012) is arguably anything but: six years into the crisis, Latvian output remains below the pre-crisis level, unemployment remains at 11% despite mass emigration, poverty and inequality have increased, social services have been slashed, and the demographic fallout of mass emigration will only be felt in earnest further down the road.

What is most interesting to note, then, is that the Latvian government was in a much better position to avoid the social pains of austerity than the countries of the eurozone periphery but nevertheless chose not to do so – and it chose not to do so because what seems like a dysfunctional choice from the point of view of society as a whole, is in fact a perfectly rational course of action from the point of view of particular vested interests. From the standpoint of the financial elite and of the politicians that represent it, joining the euro and abandoning the lats has little to do with the pursuit of noble continental ideals, and a lot to do with further reinforcing of class power. Little wonder then that not more than 22% of Latvians favour joining the euro. And so the tragedy continues.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

What is EU Membership all About?

19. December 2013, von Almut Möller, Comments (0)

This is my last entry in the Eurozone 2013 blog. I want to conclude with some general remarks tackling what sounds like a rather innocent question and is the subject of a paper I am working on: What is EU membership all about? The question was put to me for a talk at a summer school in Britain earlier this year. Needless to say, the British are particularly concerned with what I call the changing notion of EU membership. Is it essentially about the single market, Eurozone membership, or about a community of rules and values? All of them really, one might respond, but things are not that simple anymore.

Ever since the governments of the Eurozone started to repair the dysfunctional economic and monetary union the notion of membership has been blurred. This development is nothing new – we have seen that the essence of EU (formerly EC) membership shifted along with successive treaty reforms, most markedly with the Treaty of Maastricht that significantly widened the scope of joint policies. With the need to further integrate EMU in the course of the crisis we are currently seeing yet another shift of membership – one that might turn out divisive.

What kind of union are we talking about? This question challenges not only the political identity of euro and non-euro members of the EU-28 such as the UK and Poland. It also poses questions for countries eligible to or on their way to membership such as Serbia and the other non-EU Balkan states or Turkey for that matter. While the pre-crisis European Union was by no means the monolithic bloc as which it was often portrayed the notion of membership got even less clear cut in the course of the crisis.

Why does this matter? Has the union not been dealing with different layers (a colleague once branded it the “European Onion”) for quite some time, the euro and Schengen being the most prominent examples? From an outside point of view, the demarcation between Europe as a continent, the European Union of 28 members and the eurozone of 17 – 18 with Latvia joining in 2014 – is not that clear anyway and not so important. For EU Member States, however, the degree to which they participate in the union’s policies clearly matters. It determines the rules that countries have to adopt, their rights and obligations, their access to policies, institutions, decision-making and resources. It matters to the daily reality of citizens in the EU’s Member States – think, for example, of borderless travel granted only to Schengen members. And, one aspect that gained particular relevance in the course of the crisis: the degree of participation in the EU’s policies, in particular EMU, influences the overall clout of Member states in the Union. The power question is back.

Arguably the direction of the Union is defined by the members of the eurozone nowadays. True, most non-Euro members signed up to the new legal arrangements that were adopted since the beginning of the crisis, and countries within the eurozone tried to keep the ‘outs’ close to their bosom. A fragmented Union is risky for all Member States, and realising this has so far been the glue for cohesiveness. But will it hold as the eurozone continues to move ahead next year?

The notion of membership has also been challenged when it comes to the Union’s values. What role do Member States still attribute to the values of their founding treaties? How could Member States invite Greece to join the Eurozone with such obvious deficiencies in its state functions and its market economy? A question that not only the union’s newest member Croatia might ask after having been through a detailed and demanding fitness regime in preparation for accession. Then, how on earth was it possible that the most important countries of the eurozone, Germany and France, both on several occasions violated the Stability and Growth Pact ten years ago without being sanctioned by the European Commission – arguably the early kiss of death for the euro in its current shape? What makes the Hungarian Prime Minister Victor Orbán so confident in pushing his luck with fellow EU countries, turning his back on fundamental rights and freedoms at home?

While the EU has developed a sophisticated set of instruments to encourage good behaviour and to punish when its rules and values are disrespected in its enlargement policy, it struggles to pull similar carrots and sticks with fellow EU members. Overall, the respect of rules and values has been watered down – consequently, member states take a certain freedom in interpreting them these days. This is a most damaging side effect of the crisis that member states will have to deal with in years to come.

The upcoming elections to the European parliament will demonstrate how vulnerable the Union has become with regard to its values. Parties and movements that claim they want a different Union but that in reality don’t want the Union to work will manage to capitalize from this worrying development.

There are two lessons from 2013 that policymakers should bear in mind in 2014: EU membership must not be divisive, and it must bring values to the fore again.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Barroso Stretches the Limits of Subsidiarity

15. July 2013, von Adriaan Schout, Comments (0)

By Adriaan Schout and Judith Hoevenaars (Instituut Clingendael)

The eurocrisis has reignited debates on subsidiarity. On June 21st, the Dutch government presented the (disappointing) results of a subsidiarity review, listing 54 EU measures or policy fields which could better be regulated at the national level. The UK is working on a more extensive proposal to flow back European powers to the national level. These national exercises are a response to delinking enthusiasm for the ‘ever closer union’, while Brussels’ influence over the Member States grows. Subsidiarity, which governs the exercise of European powers, is under pressure as EU competences are expanding and it is no surprise that it tops the agenda in several Member States.

Yet, the principle of subsidiarity suffers from institutional vagueness. Subsidiarity is not just a technical or judicial concept, but also a political one. A legalistic interpretation of subsidiarity would emphasise that the EU should legislate ‘as closely as possible to the citizens’, especially in areas where it has no exclusive competence. However, the application of the principle, of which the rules are laid down in Protocol No 2 attached to the Treaties, inherently entails a political assessment. Subsidiarity is aimed at preventing unnecessary centralisation of powers just because that would favour the functioning of the EU in the view of the European institutions. Hence, the Commission has to justify each new proposal with a convincing argumentation why Europeanisation is required. Yet, the eurocrisis has stretched the boundaries of subsidiarity and the division of competences between Member States and the EU to its limits.

As it seems, the EU Commission’s political agenda is to centralise more powers in Brussels. In this respect, the Commission is using the political opportunity and room of maneuver in the application of the principle of subsidiarity to expand EU control. Barroso calls for a full banking, economic, fiscal and political union in the ‘Blueprint for a deep and genuine economic and monetary union’. His vision of the EU includes European ministers, an increased EU budget and centralised banking supervision. In particular, the Blueprint calls for centralisation of democratic control by the European Parliament. The institutional ambitions of the Commission and its wish for further conferral of competences to the EU level are legitimised by underlining that “national economic policy-making paid insufficient attention to the European context within which the economies operate”. In other words, the message is that the Member States can’t govern their economies, so national competences have to be handed over so that the EU will do it for them.

The blueprint is not written in the spirit of subsidiarity, exploring how the national administrations of the Member States can be strengthened to meet EU requirements, but from a centralised perspective. In response to the eurocrisis, the economic governance powers of the Commission have already expanded substantially. In the traditional division of roles the European institutions would set the standards (3% and 60%), the national governments or regions would be responsible for the implementation and the Commission would monitor and control the Member States. The EU reaction to the crisis has set aside this model of governance, deviating from the principle of subsidiarity, by pleading for more powers and budgets.

The principle of subsidiarity is reduced to a mere check box in the legislative procedure and has fallen victim to the political aspirations of the Commission. National governments and especially national parliaments – as guardians of the principle of subsidiarity – must ensure a strong subsidiarity test as a mandatory part of each EU legislative process also when it comes to the responses to the eurocrisis.

Reckless Spending and Excessive Wage Growth: Myths Debunked

13. June 2013, von Alexandre Abreu, Comments (0)

If I were to pinpoint the two most harmful and most often repeated myths at the core of the orthodox account of the euro crisis, these would surely be, first, that the public debt crisis across the eurozone was solely or mostly caused by reckless government spending; and second, that the fundamental competitiveness problem of the economies of the eurozone periphery is a result of excessive real wage growth. Both of these propositions have been repeated so often that they have become a sort of common wisdom – and yet they are both false.

Let us begin with the first proposition. The problem with it, of course, is that it disregards the crucial facts that: a) budget deficits are an endogenous variable whose ‘receipts’ and ‘expenditures’ components are both adversely affected by recession, as indeed they have been in the last few years and especially so in 2008-2009; b) that in many eurozone countries, bank bailouts account for a substantial portion of the budget deficits of the last few years and c) that factors other than budget deficits contribute to public debt levels spiralling out of control – namely the compounding interest charged on that debt, particularly when far in excess of GDP growth (the so-called ‘snowball effect’). Take all of these into account and you get a very different picture from the alleged government largesse.

Of course, there is a lot to be said about the quality of public finance in many of these countries in the last few years or decades, including with respect to ruinous public-private partnerships, tax exemptions and other forms of government capture by vested interests. However, the idea that the simultaneous public debt crises of numerous eurozone countries was caused by governments in all of these countries suddenly and recklessly deciding to increase spending on a whim is, quite simply, not true. What really underlies the public debt crisis is the lethal combination of recession, deflation and the unbelievably Byzantine financial-sector mediation between the ECB and governments (a case-study in financial expropriation for many decades to come). And the corollary is that austerity only makes everything worse and will continue to do so; the only way to solve the (public and private) debt crisis is growth along with moderate inflation (and in some cases the inevitable write-downs).

The second fallacy is also a particularly persistent and pervasive one, and usually relies on showing how the nominal compensation of employees, or alternatively unit labour costs (ULCs), increased in excess of productivity in the eurozone periphery in the last couple of decades, thereby causing competitiveness to deteriorate. In turn, this argument very quickly leads to the conclusion that regaining competitiveness requires sharp wage cuts (internal devaluation). This, too, has been repeated to the point of exhaustion, perhaps most notably and recently by Mr. Draghi in a two-hour session with the eurozone’s 17 heads of state and government in March (see the power point here). Both the argument and the conclusion are plainly wrong, however.

As Felipe and Kumar show in one of the most important (and neglected) papers to have been written on the euro crisis , while ULCs lend themselves to an intuitive and correct interpretation at the firm level (say, the labour cost of producing a table or laptop), at the aggregate level of the economy they are constructed using the economy’s value added, rather than physical quantities, as the measure of output – and therefore the ‘intuitive’ interpretation is no longer appropriate. Rather, these authors show algebraically that, at the aggregate level, ULCs are nothing other than a simple product of two factors: the labour share in the functional distribution of income multiplied by the price deflator (rate of inflation). Allow me to rephrase this: an increase in aggregate ULCs can only be accounted for about by an increase in the labour share of income and/or by inflation. Indeed, we can construct an exactly analogous indicator, called Unit Capital Costs (UKCs), which increases to the extent that the capital share of income increases and/or that there is inflation. And what do we get when we do compute this indicator for the eurozone economies? Refer back to Felipe and Kumar (p. 16) and… lo and behold: with the sole exception of Greece, UKCs increased more than ULCs in every single euro zone country both between 1980 and 2007 and between 1995 and 2007.

The interpretation should by now be obvious: Greece was the only euro country where the functional distribution of income changed in labour’s favour in the last three decades; in all the other countries, the capital share of income increased at the expense of labour; and the extent to which the various economies had greater or lesser increases in both their ULCs and their UKCs was a consequence of differential inflation. So ULCs are really quite distinct from real wages; and following this aggregate approach to its logical policy consequences would entail measures to cut down profits, not wages, in order to regain competitiveness. The real culprits of the differential change in ULCs (or the nominal compensation of employees) across the euro zone is differential inflation and the real wage decrease in the European core – not real wage increases in the periphery.

Promoting competitiveness in the periphery through wage compression is therefore both cynical and wrong – in several different ways. First, workers are being forced to foot the bill twice over; second, the prime determinant of economic competitiveness is not sale price per se, but rather sale prices combined with the pattern of productive specialisation (and recessionary internal devaluations are not helping with the latter, either); and third, the Great Stagnation that the US and Europe as a whole have been living through is a consequence of insufficient demand in the context of a massive (though protracted) process of debt deflation, so compressing wages in the current context is a sure way to further compress demand and curb growth (see here for more detailed information on this).

On some occasions, this erroneous diagnosis takes on an especially aberrant and cynical twist: that’s when the argument is constructed around a comparison of nominal ULCs (or the nominal compensation of employees) with real (i.e. deflated) productivity. Seems obviously wrong even to a first-year undergraduate, wouldn’t you say? Well, that’s actually what many analysts and commentators have been doing for quite a while – and it’s also a key part of Mr Draghi’s story (check slides 9 and 10 in his power point presentation, link above).

So neither is the public debt crisis caused by reckless spending, nor is declining competitiveness a consequence of excessive wage increases. And yet, these ‘fairy tales’ are repeated again and again to make us believe them and are used as a pretext for deleterious and counterproductive policies. We’ve been here before (does the name Heinrich Brüning ring any bells?) – and it wasn’t pretty. Shouldn’t we be taking the lessons from history far more seriously?

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Frau Merkel and the ‘C-Word’

5. June 2013, von Almut Möller, Comments (0)

Both the European Commission and the International Monetary Fund (IMF) have just published findings about the performance of the German economy and the state of structural reforms. While there is plenty of discussions in Berlin about what ‘the others’ (in particular France) are not getting right, there is not much of a debate on what ‘the others’ (Commission and IMF) suggest that Germany is or is not getting right. The new findings did not get much attention in the public debate.

Not surprisingly perhaps, as both reports continue what sounds like good news and point out that Germany’s public finances have been overall sound. The IMF underlines that Germany’s “safe haven status and strong balance sheets” has been an “anchor of stability” during the eurozone recovery. When it comes to the recommendations, however, the IMF experts do again not shy away from getting involved with the politics of the euro crisis, welcoming this year’s marginal loosening of the fiscal stance: “(…) fiscal over-performance should be firmly avoided as it could imply a contractionary fiscal stance that is unwarranted in the current low growth environment.”

The Commission is more cautious on the question that has been dominating the eurozone debate for the past months: is Germany that is leading on fiscal consolidation (which makes it look like the teacher’s pet, something Chancellor Merkel was so pleased about in her home country) the real burden to the eurozone? It is hardly surprising that the Commission avoids this hot issue, since the report is a mere recommendation to the Council of Ministers. And, arguably, the Commission diligently follows a rather narrow mandate in assessing German fiscal policy and its 2013 national reform programme. However, against the background of a fierce debate (mostly resonating outside of Germany) on how to trigger jobs and growth in the eurozone the European Commission’s proposals look rather innocent. Frau Merkel, of course, will have been pleased not only with the findings, but also with the fact that the Commission basically restricted itself to inserting the data they collected in the Member States into tables without spending too much time on interpreting them.

The IMF underlines Germany’s crucial role in shaping the future institutional and legal framework of the eurozone. This reads like a hardly veiled criticism on Chancellor Merkel’s so far rather woolly ideas. Just last week, her joint proposal with President Hollande on establishing the function of a permanent president for the eurozone raised eyebrows even within her coalition in Berlin. While I believe it was right to respond to the French initiative launched by President Hollande, as I suggested in my previous blog piece, Merkel should not underestimate the attention she gets for such moves. She might have considered it as a friendly yet half-hearted response to the bruised neighbour, likely to end up watered down or even abandoned the moment its gets on the agenda of the 27 members. But Merkel should know that any move that might shed light on where Germany wants to take the eurozone is taken rather seriously these days and tactical moves are likely to be met with indignation.

Another more telling intervention of Angela Merkel received attention this week. In an interview with DER SPIEGEL the chancellor reiterated what has become in my opinion the word around which she develops her construction plan for Europe: coordination. In her world, the Commission president has a “coordinating function over the policies of the national governments” and therefore should continue to be nominated by the heads of state and government (with a certain role for the European Parliament to play). No more transfer of competencies to the Commission, but improved coordination in policy areas that can strengthen the competitiveness of the eurozone. Read again her Bruges speech of 2010 – it is pretty much in there already.

Needless to say that Merkel’s “c-word” has been a declaration of war to those who carry the “f-word” banner (in the continental, not the British understanding of federalism) advocating for strong and independent EU institutions. A widely overlooked decision: the heads of state used a clause in the Lisbon Treaty and agreed to keep one Commissioner for each Member State at the recent May summit. While this was only a formal adoption of a decision previously being granted to Ireland, Chancellor Merkel was surely pleased. After all, the European party families are gearing up their campaigns for the European Parliament elections in 2014 with joint candidates for the post of the Commission president. What a nightmare for the ‘c-lady’ to imagine a democratically legitimised president of the European Commission representing the majority in the EP, presiding over a reduced college of Commissioners. What would the reports of such a more independent figure have looked like?

After the questionable results of the “open methods of coordination” in the Lisbon Strategy of 2000 – will coordination as a mode of governance get its second wind? Frau Merkel is taking the lead in its revival.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Doubts about Rehn’s Position as Independent Commissioner

7. May 2013, von Adriaan Schout, Comments (0)

Rehn has spoken. Friday 3 May, the independent Commissioner for economic and monetary affairs gave his verdict on the state of the national economies in the EU. His statements were remarkable in several ways and come at a time when he has to prove his worth as an independent Commissioner. France, which has been dragging its feet regarding the necessary reforms, has received two extra years to bring its budget in order although its deficit is 4,2% and its public debt is moving towards an incredible 96,2% next year. The Dutch are in a better position but received a one year delay while allowing the public burden to increase instead of pushing for reforms. Newspapers and civil servants point to heavy lobbying of, in particular, France.

How do we know whether Rehn has spoken words of wisdom? Whatever Rehn says, he will always be criticised by many. If he criticises, for example, Berlusconi for having failed to reform, even his Italian colleague Antonio Tajani (Commissioner for industry) openly speaks out against him. If he cautions over austerity, he is criticised by EPP MEPs for failing to keep Member States to stick to the rules of the Stability and Growth Pact (SGP). Even Barroso has been going over Rehn’s head by stating that austerity has reached the limits of popular support – displaying evidently that Barroso is primarily a politician. Barroso may not have contradicted Rehn over the need for some slack, but his comments have placed Rehn’s work as independent Commissioner in a political light and Barroso has hinted at differences in the Commission. Other attacks come from economists and Nobel-prize winner Paul Krugman made fun of Rehn’s over-optimistic growth forecasts in the Financial Times and slashed his emphasis on austerity (‘Rehn of Terror’). Hence many, including his colleagues in the College, disagree with whatever Rehn concludes.

Rehn’s advice is easily distrusted. Therefore, the analyses and recommendations of the European semester commissioner should be widely recognised as the result of careful examination of long term trends in national and European economies. The weight of his words depends in many ways on the respect peers in governments, journalist and financial analysts have for the independent Commissioner as institution. His prestige depends on the analytical quality of the reports of DG EcFin, on the reputation of this staff and on the extent to which procedures are trusted to guarantee quality and independence.

Much has been achieved in terms of ensuring the quality of the work of DG EcFin, but not enough. First of all, there are trends that are incompatible with the role of an independent Commissioner. The Commission is increasingly presenting itself as a political body, searching political support from the European parliament and calling itself a ‘government’. This seems to be a worrying step away from the traditional focus of the Commission on content as envisaged by Jean Monnet. An ‘independent Commissioner’ as part of a political ‘government’ seems to be a paradox if not a straightforward contradiction. Pleas in Barroso’s State of the Union (2012) to operate ‘independently under the supervision’ of the European Parliament are equally confusing.

Secondly, the process through which the independent Commissioner formulates conclusions and economic advice to Member States needs to live up to standards such as independence from political influence from both within the Commission and from Member States, quality (size and expertise) of the staff of DG EcFin and transparency. However, if we try to piece together how DG Ecfin operates within the Commission, we cannot conclude that quality and independence are guaranteed.

To start with, reliable statistics are the basis of any economic report. It was already known to insiders that European statistics were unreliable but the Greek crisis in 2009 proved that some countries provided rubbish if not lies. No economic system in the 21st century should aspire to function on the basis of a suspicious statistical system. Moreover, if only for its prestige, Eurostat should not fall under the College of Commissioners but should be an independent agency.

Moreover, although major improvements are to report in terms of economic governance resulting from the 2- and 6-pack, the European semester is still not supported by a transparent depoliticised analytical process. DG EcFin has been enlarged but it is still unclear what is being done with its staff reports. The parts of DG EcFin that are independent remain in any case dependent on other – political – DGs for sector input. Also, the staff papers are forwarded to the College. The staff papers are ‘the sole responsibility’ of the independent Commissioner although officially other Commissioners may pose questions and other DGs are consulted in the writing of SGP reports and of conclusions of the macroeconomic imbalances procedure. Furthermore, the President of the Commission is supported by a Chief Economic Analyst in the process of the drafting of the recommendations. It is unclear why Barroso has an additional analyst if reports are produced by Rehn and DG EcFin. Finally, there are actually confirmations that the recent statements by Rehn have been strongly influenced by national lobbying.

Hence, also the production of the country reports and recommendations should be set aside in an independent agency – just as the 6-pack dictates that Member States should have independent budgetary authorities. If there is an ‘independent Commissioner’ he should not be part of a College. This would also improve the transparency of the process.

As it stands, the legitimacy of the Commission’s role in the renewed European semester remains weakened by compounded functions and procedures. One thing economic governance requires is reliable and transparent institutions. The Commission, of course, will be strongly opposed to any discussion of redesigning its tasks and powers. A pity for those who hoped that the European semester was the start of something new.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Euro crisis: a View from Lisbon

20. February 2013, von Alexandre Abreu, Comments (0)

In my first contribution to this blog, I would like to start with outlining what I’ll set out to do in the coming months. The readers of this blog will be quite familiar with the ‘orthodox’ account of the current crisis in the eurozone: profligate public spending by governments in the European periphery, which need to be brought under discipline from the outside, coupled with anaemic growth/recession largely caused by excessively high wages and excessive labour market regulation, calling for ‘structural reform’. Moreover, readers will also be well acquainted with some of the systemic aspects which have long been emphasised by the more politically-progressive accounts: the inability on the part of peripheral economies to adjust to asymmetric shocks after having forfeited most of their economic policy instruments; their dramatic loss of competitiveness due to an overvalued Euro and an overvalued implicit internal exchange rate; the ECB’s late, indirect and highly conditional assumption of its role as lender of last resort; not to mention the deleterious effects of austerity upon growth, employment, social cohesion… and even the budget deficit and the sustainability of public debt themselves.

I will not be rephrasing these arguments in detail. Rather, in addition to commenting on new developments as they occur, what I’ll try to do is to render all of the above a bit more vivid to you by showing how these rival accounts apply to the Portuguese case; how general factors and forces at the European level articulate with class interests in Portugal; what the effects of the prescribed medicine have been in this country; and what the balance of forces and the state of the public debate are at any given moment.

As an appetiser of sorts, here are some of the issues that I’ll be expanding on in my next few blog posts:

  • Seen from the left, burgeoning public debt is largely a consequence of the crisis, not a cause (Portuguese public debt stood at 72% of GDP in 2008, compared to over 120% at present). However, there have been, and continue to be, serious issues concerning the quality of public spending (including public-private partnerships that commit the Portuguese Government to ensuring internal rates of return in excess of 10% to major conglomerates for decades to come).
  • Seen from the left, rising labour costs in Portugal have not been the cause of deteriorating competitiveness (indeed, unit capital costs have increased more than unit labour costs over the last two decades). Rather, the overvalued (implicit and explicit) exchange rate, alongside the inability to upgrade the pattern of productive specialization (itself explained by structural factors), are what is to blame.
  • Seen from the left, the medicine that has been prescribed in tandem by the ECB-EC-IMF “troika” and the right-wing Portuguese government places all the burden of an “adjustment” which will not work upon those who are most vulnerable and least responsible: workers and popular classes. This involves dismantling a Welfare State that is barely 40 years old, having been a product of the 1974 democratic revolution – a settling of scores long sought by the most conservative sectors of Portuguese society.
  • Seen from the left, the way in which the crisis has been addressed so far by both the Portuguese and European authorities is not at all about bringing public debt under control or boosting competitiveness. Rather, it is about seizing a unique opportunity to re-engineer society in neoliberal fashion, by dismantling the Welfare State and sharply compressing direct and indirect wages.

These are critical, dangerous, but also very interesting times. I hope you’ll find my left-leaning views from Lisbon to be interesting and informative, too.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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