The economic governance of the European Union

Presentatie op de Interparliamentary Conference on Stability, Economic Coordination and Governance in the EU

Dear delegates, ladies and gentlemen,

The EU has undergone fundamental economic and budgetary change since the beginning of the 1990s. The ambition of the Economic and Monetary Union was set out in the Maastricht Treaty of 1992, and the single currency was introduced in 2002. The participants in the euro area are economically highly dependent on each other, they share common interests and have a constant aspiration to strengthen the emu.

In parallel with these developments, a common EU policy has arisen on economic and budgetary matters to strengthen the EMU wherever possible. But policy tensions are evident between the member states’ desire to retain as much autonomy as possible and the understanding that common, strict rules on compliance and enforcement are necessary to guarantee healthy financial policies in the member states and the stability of the EMU. The tensions can be seen in the compromises made in agreements: there are binding EU instruments such as the Stability and Growth Pact on the one hand and ‘soft law’ such as the Europe 2020 strategy on the other.

The interests of the EU member states are twofold. On the one hand, they benefit from the proper functioning of the emu and the euro area. Clear and effective procedures, rules and agreements are needed to foster confidence in the governance of the EU and underpin both economic  performance and the sustainability of public finances. On the other hand, the member states have agreed to implement the macroeconomic and budgetary policies in accordance with the applicable rules and can be assessed on these rules. This can have consequences for the autonomy of national financial policies.

Since the outbreak of the financial and economic crisis in autumn 2008 the system has been under pressure, flaws have been revealed in the design of the EMU and especially the euro area and loopholes in EU legislation have been exploited.

In response to the crisis, the EU - and within it the Eurozone countries - rapidly launched a succession of legislative and policy initiatives. European support programmes were developed and emergency measures were established in consultation with the IMF to support certain member states. A banking union has been  launched to place the significant banks in the euro area under the surveillance of the European Central Bank. And new economic and budgetary rules have been introduced to strengthen the EMU: rules to strengthen the EU’s budgetary surveillance of the member states and rules to establish macroeconomic surveillance of the member states. These rules are also part of the  European Semester.

In September 2014 the Netherlands Court of Audit published a report that considers the new economic and budgetary rules which were implemented to strengthen the EMU. We have done so because these new rules may have consequences for the budgetary procedures of the Netherlands. But because these rules are ultimately about trust in the euro, we decided to adopt a wider approach that also involves the EU-institutions and member states. Our audit – which is a compliance audit – led us to draw conclusions, and think about lessons for the future. I would like to share some of this with you today.

The next slides contain some of our key findings, some of which have been recently updated.

Slide 2 Selected key findings: Stability & Growth Pact

This figure shows at what times euro countries were subject to the excessive deficit procedure (in yellow), and when countries were given notice by the Council to take measures ( in orange).

We can see that EU rules on the surveillance of the member states’ budgetary policies were not applied in full or consistently since 1999. Only a few countries were given notice to take measures on some occasions. And financial sanctions were never imposed. Countries that didn’t meet the conditions were granted a postponement. This has only marginally changed since the introduction of the new measures since 2010. In recent years the number of countries subject to the excessive deficit procedure has declined. However, the European Commission often decided not to start a procedure because of special circumstances, leading to a temporary decline in budgetary discipline.

I would like to add here that those new measures that strengthen the member states’ budgetary and macroeconomic policies have produced a complex body of laws and rules. This complexity makes it harder for the European institutions to enforce the rules and agreements, assuming of course that this enforcement will strengthen the Eurozone. I will come to that.

Its is also clear that because of the introduction of the new rules from the sixpack and twopack, more opportunities have arisen for the EU to supervise and hold the member states accountable for their budgetary and macroeconomic policies. However the EU’s de facto ability to change anything in the member states’ policies is limited, because in the end the member states still call the tune.

Slide 3: Selected key findings: Macro-economic Imbalances

This figure shows how the macroeconomic imbalances procedure has worked to date. The procedure has been limited to the detection and prevention phases, but the number of countries with excessive imbalances has increased in 2014 and 2015. So far the corrective phase of the macroeconomic imbalances procedure has not been activated.

It is important to note that the Commission has discretionary powers in deciding whether or not there is an excessive imbalance for which the corrective phase of the macroeconomic imbalances procedure has to be activated. How it weighs the nature and seriousness of an imbalance, however, is not completely transparent.

Furthermore, the member states’ accountability to the European institutions is still being developed. The European Commission has launched a debate on harmonising national reporting systems, strengthening accountability and improving the underlying comparability of the member states’ performance in the field of budgetary policy. We see this as an important development.

A final issue I would like to address is that the customary good governance arrangements of democratic control and accountability in place for the EU, do not apply equally to the Eurogroup or its President. Yet the influence of the Eurogroup has increased, including in the decision-making processes regarding budgetary and macroeconomic policy.

Slide 4 Some lessons for the future

Ladies and gentlemen, when our report was published we addressed the Dutch parliament with some possible lessons for the future. I am pleased to be able to do this now for parliamentarians from the EU as a whole.

In the past decade we have seen that member states did not consistently comply with the budget reference values set in the years before the 2008 financial crisis unless the European institutions made a last-minute move to enforce them. Setting a complex set of rules and not enforcing them undermines in our opinion, the credibility of and the trust in the  effectiveness of European economic governance.

The ultimate goal of strengthening European economic governance is to regain and secure the confidence of the financial markets, the public and business in the functioning and performance of the European economy, and especially that of the euro area.

The extensive body of rules, agreements and procedures calls in the first place for greater transparency and simplification of European economic governance. Parliaments could insist on more consistency in European economic governance, eliminate overlaps and simplify the procedures where possible.

Furthermore, a number of steps can be taken to increase transparency in the near term. In the macro economic imbalances procedure, the European Commission’s scoreboard now clarifies the relationship between the member states’ efforts to improve their macroeconomic performance. We think transparency for parliaments and the public would be enhanced if a comprehensive statement were prepared not only of the state of the macro economic performance but also of the various elements of the stability and growth pact, as well as the member states’ implementation of the country specific recommendations.

It is also important to note that European economic governance is increasingly raising the importance of sustainable public finances in the long term. The structural balance has gained a more prominent place in European economic governance. In this respect the debate I mentioned before on the harmonisation of reporting rules in the EU is very relevant for you as parliamentarians. It offers greater opportunity for you to obtain a more comprehensive and transparent EU-wide review of the sustainability of public finances than is at present the case. More governmental and parliamentary attention should be paid to this.

Finally, I would like to mention here is that more attention for the governance of the Eurogroup, and in particular to its democratic control and accountability, is warranted. We are pleased to see that the President of the Eurogroup has put the transparency of the Eurogroup on the agenda of its meeting last week.

But let me emphasize that it is particularly important to be aware of the fact that the person of the President is not (yet) embedded in the European institutions. This must also be borne in mind if in the future it would be decided to appoint a permanent President.

Slide 5 In closing: a dilemma

Ladies and gentlemen, I want to close my presentation with a dilemma. It is obviously in the interest of all EU member states that the Eurozone functions properly. The economies of these countries – and also the futures of its inhabitants – for a large part have come to depend on it. For the Eurozone to work, for one thing the budgetary discipline of the member states has to be strengthened.

So does it work?

We have seen in the past years that the EU has adopted a rule based approach in increasing the budgetary discipline of the EU member states. The EU has tried to regain the trust of the markets and other parties by introducing more rules, and/or tightening existing rules – such as the stability and growth pact.

What we have seen happening however is that the compliance of EU member states with these rules they have agreed to themselves still is not optimal. Moreover, the rules haven’t been fully enforced by the EU. This raises the question whether this rule based approach is the best way to coordinate the economies of the member states. Or to put it differently, do the member states really want that the European economies are being directed from Brussels, or is strengthening the eurozone simply too complex to coordinate via rules?

This current ambiguous approach to steering the economics of the Eurozone, having the strict rules on the one hand and not enforcing them on the other, does not help to improve confidence of the financial markets, the public and business in the functioning and performance of the European economy. I think a strong and fundamental debate on the governance of the Eurozone, and what is needed to make it economically sound, is necessary. In this debate the role of you as national and European parliamentarians is of the utmost importance.

But maybe it is too soon to tell. In the aftermath of the crisis Economic governance is still being developed and new rules and procedures, but also positions and relationships are still taking shape. These new arrangements must prove themselves in practice. Their contribution to bolstering confidence in the EU and, within it, the euro area will be seen in the years ahead.

Thank you for your attention.