The Commission’s Challenge: Creating long-term economic strategies amid financial chaos
By Philipp Brüchert, Head of Financial Service Practice
As major banks started to tumble in 2008 (with little chance for many of them to get up again by themselves), Europe slipped into a major economic recession in 2009. Against this tumultuous backdrop, the idea of bringing in an entirely new European Commission in early 2010 was daunting. At the time, there were many measures that urgently needed to be adopted in order to prevent the European economy from coming to a full standstill. The rapid deterioration of public finances in certain EU Member States, and Greece in particular, in the first half of this year and the subsequent weakening of the Euro are constant reminders that the European Union needs strong, established leadership. Adding to the European chaos of early 2010, the EU was also struggling to implement the Lisbon Treaty, the new legal framework that governs how EU institutions operate. With the fanfare of a new Commission being introduced amid the economic chaos, even a casual European observer might begin to wonder whether the Commission, the Parliament and EU Member States really had their priorities right.
Around the world, 2008-2009 was a period of firefighting and addressing immediate economic crises, and while the need to address the immediate threats of financial instability and sovereign debt will continue for the foreseeable future, EU policymakers should try to make 2010 a year in which more systemic, long term reforms are undertaken. In this context, a fresh Commission with new drive and perhaps new ideas is a positive development.
100 days after their installation in Brussels, the new Commissioners are ready for their first economic report card. What have they managed to achieve so far, and perhaps more importantly, what can they realistically achieve in the months to come?
After the economic turmoil of 2008-2009, the world has recently started to see signs of economic recovery. While that is a positive indication, the reality is that this recovery is modest and fragile, and it comes at a huge price. Massive rescue packages and fiscal stimuli were adopted by various European and international governments over the past 1 ½ years. These have left tremendous gaps in the Member States’ public budgets. Extremely high levels of public deficit and debt, combined with longtime sloppy handling of public finances in some Member States, have again brought uncertainty to the financial markets and the economy as a whole. As Olli Rehn, the current Economic and Monetary Policy Commissioner, rightly put it, the critical question now is whether the real economic recovery can sustain the renewed financial turbulence.
In 2009, the old Commission focused on preparing legislation to address shortcomings on the financial markets and financial institutions. Going forward, the new Commission will need to do more; it will have to closely cooperate with the Member States and other stakeholders to ensure sustainable economic growth. While it is the Member States’ role to ensure fiscal discipline and to control their revenues and expenses in an efficient manner, the Commission must ensure that we see a coherent approach in Europe and to prevent individual Member States from taking off in different directions.
Luckily, the Commission seems to be doing just that. In May, it outlined proposals to reinforce economic governance in the EU. Key elements include:
- A reinforced compliance with the Stability and Growth Pact and deeper fiscal policy coordination. This should be achieved through better ex-ante coordination. Also, recurrent breaches of the pact should be treated more expeditiously, and more attention should be provided to public debt than has been done previously.
- Strengthening and broadening surveillance of macroeconomic developments in the euro area. Among various measures, the Commission could assess macroeconomic imbalances and developments and could issue early warnings to a Euro-area Member State or the Euro-area as a whole. This could also be done through a formal Council act on a proposal by the Commission.
- A European semester. This would involve developing an early coordination system for Member States as they prepare their national budgets and reform programmes. The Council, based on the Commission’s assessment, could formally provide its assessment and guidance at a time when important budgetary decisions are still in a preparatory phase at national level.
- A robust framework for crisis management for Euro-area Member States. Similar to the temporary European stabilisation mechanism agreed in May (mainly in response to the current Greek crisis and its negative effects on the currency as a whole), the Commission will make a proposal for a permanent crisis resolution mechanism.
These proposals have the potential to create a proper framework for a better coordination between the Member States and have now been picked up by a special task force on economic governance. This task force is composed of the EU’s finance ministers, Commissioner Rehn, European Central Bank President Trichet, Eurogroup-head Juncker and EU Council President Herman Van Rompuy. They will aim to find an agreement while the Commission starts drafting legislative proposals.
All-in-all, it appears that the Commission has started to act on the most pressing economic issues and is starting to look at long term solutions. The question will be whether it will be able to deliver concrete and efficient proposals that are acceptable to the EU’s Member States. But the truth is that addressing these issues requires a concerted effort by all EU institutions. Without help and support from other EU institutions, the Commission will not achieve much.