Tightening economic governance in the euro area

The heads of government meeting in Brussels today will give a new impetus to the tightening of economic governance in the euro area. The pact signed earlier in March was not given enough importance by the media for most people to understand how they will be affected by the new rules that will be grafted in the economic strategies of their respective countries.

The aim of this effort – or pact as it is being called by the euro area leaders – “is to strengthen the economic pillar of the monetary union, achieve a new quality of economic policy coordination in the euro area, improve competitiveness, thereby leading to a higher degree of convergence.” This agenda is underpinned by an aspiration for faster economic growth and “higher levels of income for citizens and to preserve our social models”.

These declarations of intent are hardly the stuff that can create controversy amongst the member states that may have different economic priorities and strategies. But despite the show of unity that will be projected by EU leaders for the TV cameras, the implementation of the measures contemplated in this pact will undoubtedly cause friction between certain member states.

One of the guiding rules of this pact is that in order to strengthen the existing economic governance member states will have to make a “special effort going beyond what already exists and include concrete commitments and actions that are more ambitious than those already agreed, and accompanied with a timetable for implementation.”

Put simply, the fiscal deficit and national debt restrictions contained in the Stability and Growth Pact have to be supplemented by “concrete policy commitments and monitoring to ensure that countries facing major challenges in competitiveness, employment, fiscal sustainability and financial stability commit themselves to addressing these challenges in a given timeframe”. This is the nearest that we have come to economic and fiscal strategy integration within the EU.

The monitoring of the implementation of these measures will not be a passive one. While reiterating the subsidiarity principle for defining fiscal and economic strategy, the European Council will challenge on a case by case basis national economic practices like, for example, wage indexation. Does this mean that we are under notice to reform our COLA mechanism?

The pact also aims to “ensure that wages settlements in the public sector support the competitiveness efforts in the private sector”. Will this mean that powerful public service trade unions will no longer be allowed to flex their muscles to secure hefty wage increases that are not justified by an increase in productivity?

Other measures that the European Council is intent on introducing include further opening of sheltered sectors especially in the areas of professional services and the retail sector “to foster competition and efficiency”. There will also be measures to “improve education systems and promote R&D, innovation and infrastructure”. The elimination of red tape will also attract a new effort in order “to improve the business environment particularly for SMEs”.

But perhaps the most relevant aspect of this pact is the insistence of the Council to ensure sustainability in public finances of individual member states “through a reform in pensions’ schemes, healthcare and benefit systems”. Pensions’ reforms, elimination of early retirement schemes and incentives for employment for older workers will have to feature in the National Reform and Stability Programmes of all member states. This is music to my ears as we seem to engage in endless talk about these important issues but shy away from taking any action.

The Commission has once again reiterated the principle that taxation matters should continue to be decided by individual member states. For countries like Malta and Ireland that use tax competitiveness as a means of attracting investment, the following words sound ominous: “Pragmatic coordination of tax policies is a necessary element of stronger economic policy coordination in the euro area to support fiscal consolidation and economic growth.”

The Commission, in fact intends to “present a legislative proposal on a common consolidated corporate tax base (CCCTB) in the coming weeks”. Ireland has so far made a brave attempt to resist this move as its investment policy is strongly dependant on the continuation of a low corporate tax regime. But the odds are stacked against it as it needs EU help to exit the dark tunnel of restructuring its shattered economy.

So, fiscal and economic integration in the eurozone may soon become a reality – whether we like it or not!

jcassarwhite@yahoo.com