Disagreement over the course of action in economic governance
The crisis in the budgets of a few EU Member States who have been living beyond their means (or – as in the case of Ireland – have been obliged to take on high levels of debt in order to rescue their national banking systems) has turned into a crisis for the common currency. For that reason, the European Council had already called in May 2009 for an improvement in economic governance. The final decision on the relevant proposals from the Commission is imminent.
Since the stability of a currency no longer relies on gold or any other material money equivalent but rather on confidence in responsible monetary policy on the part of the institutions set up for that purpose, the current crisis of confidence amongst the members of the Eurozone is proving to be one of the most serious tests yet for the European integration process in general. How can the European Central Bank manage reliable monetary policy when no genuine understanding exists between Member State governments, nor any confidence-inspiring cooperation in financial and economic policy? That is why, even before the introduction of a common currency, the Euro-states decided to adopt a Stability Pact, above all to enable effective limitation of budget deficits.
However, this Pact was already showing signs of weakness in 2004 when Germany and France infringed the self-imposed rules and the first reform of the Pact became necessary. In the midst of the global financial and economic crisis, it was Greece that, at the start of 2010, had to admit to the fact that the data which had been reported to Brussels and published there unchallenged did not reflect the true picture. The Stability Pact had proved itself ultimately ineffective for guaranteeing the robust budgetary and finance policy in the Euro-states so essential for the ECB. High levels of debt and public deficits are drivers of inflation, and curbing them through the setting of interest rates is the primary objective of monetary policy in Europe.
The case of macroeconomic imbalances
Besides, it has become clear that in the more general economic situation there are huge imbalances between Member States. For a long time insufficient allowance was made for these imbalances as obstacles to a harmonious European monetary policy which has, by definition, the job of managing with one single interest rate for the whole common currency area. Here, for example, one property market bubble had in fact necessitated an increase in interest rates, while in another part of the Euro currency area lower interest rates remained appropriate. This should not happen, and therefore efforts should be devoted to identifying imbalances at an early stage and dismantling them.
For these reasons – the ineffectiveness of the Stability Pact and the continuing lack of relevant policy instruments to correct macroeconomic imbalances – the European Commission responded to the request of the European Council, and in September last year tabled a legislative package consisting of six Regulations and Directives in relation to economic governance. This is intended to reform the Stability Pact and the existing procedure for excessive deficits, as well as introducing a new procedure for excessive imbalances. In future, alongside the budget deficit, greater account will also be taken of the debts as part of the deficit-control procedure. Any country whose debts exceed 60% of Gross National Product (GNP) must bring itself down to this level in stages equal to 5% annually of the amount by which it exceeds the 60% threshold. Sanctions should be imposed more speedily and a corresponding proposal from the Commission can only be rejected if the Member State concerned manages to obtain a qualified majority vote against this proposal. In future, sanctions must also be expected by any country which, in the framework of an imbalance procedure, does not heed the recommendations of the Council.
The ‘Six Pack’ route through the Institutions
On 15 March the Council of Ministers watered down this package of legislation, nicknamed the ‘Six Pack’, and reserved for itself the right to make any recommendations about sanctions. The competent European Parliament committee passed it by a narrow majority on 19 April but wishes to reinforce the Commission’s role and also emphasise its own role through the introduction of a ‘Business Dialogue’. In the meantime, negotiations among representatives of the Institutions continue in the ‘Trialogue’, and the final adoption of the Six Pack is still scheduled for June.
The opposing votes from the Social Democrats during the voting in the European Parliament and the Europe-wide demonstrations against governmental austerity measures reveal that, behind the dispute over new procedures, a conflict over the overall direction of economic policy is brewing and that, today, Europe is split into two camps. Thus, the disagreement over the Six Pack could turn into a serious test for the European Union.
Translated from the original German
“Furthermore, since the various nations largely depend on one another in economic matters and need one another’s help, they should strive with a united purpose and effort to promote by wisely conceived pacts and institutions a prosperous and happy international cooperation in economic life.”
(Pius XI., Quadragesimo Anno, 1929, Nr 89)