The main challenges confronting the Belgian presidency of the European Union in the second half of 2010 concern the European Union’s economic agenda. The banking crisis, which occurred late in 2008, caused an economic crisis that seriously affected all Member States. It has become clear in recent months that some causes of the crisis should be dealt with at European level. The regulation of the financial sector is one example. The European Commission has tabled several proposals that are subject to intensive negotiations between the Member States and with the European Parliament.
What has also become clear is the need for structural measures to strengthen the European economy as a whole. The Lisbon Strategy, intended to make the European Union the world’s strongest economy by 2010, has failed. A new approach is needed. Just before the start of the Belgian presidency, the European Council adopted the ‘Europe 2020’ proposal, which should take on a more definite form in the second half of the year.
Debate on economic governance gained real momentum with the onset of the Greek debt crisis early in 2010. There were pleas for more European control over national budgets and the possibility of imposing sanctions on countries that showed insufficient budgetary discipline. As a consequence, the European agenda in the second half of 2010 is dominated by how to tackle economic issues.
Monetary union but no economic governance
When in the early 1990s it was decided under the terms of the Maastricht treaty to create a single currency some economists immediately pointed out that monetary union also required close economic cooperation.
Countries joining the euro zone must have healthy public finances, respecting the Maastricht criteria, even if these were interpreted in a very flexible manner when the euro was launched. It soon became obvious that economic policy in the euro zone countries diverged widely. Monetary policy is decided centrally by the European Central Bank but there is no single economic policy. Euro zone countries have completely different priorities with regard to fiscal affairs, employment policy and wage agreements. Some of them have strong positive trade balances while others are less export-oriented.
The finance ministers from the euro zone meet on a regular basis in the eurogroup, led by Jean-Claude Junker but these meetings are informal and certainly not about economic government.
Nevertheless, there are some European agreements. The main one is the Stability and Growth Pact that stipulates that a Member State’s budgetary deficit must not exceed 3 per cent. Euro zone countries exceeding this limit are liable to sanctions. However, enforcing these sanctions requires a political decision: Member States must vote expressly about fines for other Member States. When, in 2003, the euro zone’s biggest members France and Germany got into trouble and had deficits above 3 per cent, the sanction mechanism was ruled out de facto. No country has ever been fined for breaching the pact.
Countries are compelled to draw up regular Broad Economic Policy Guidelines and Stability and Convergence Programmes, indicating how they intend to achieve European aims in areas such as employment. These documents are presented to the European Commission and the other Member States. But this peer review leads to non-binding and therefore noncommittal recommendations at best.
It took until 2010 in the wake of the financial and economic crisis and particularly the Greek debt issue for the matter of economic governance to be placed at the top of the European agenda. The Lisbon treaty that came into force late in 2009 provides under article 136 for possible measures for euro zone countries “to strengthen the coordination and surveillance of their discipline” and “to set out economic policy guidelines”.
The Greek debt crisis dominates the 2010 agenda
The Greek debt crisis in January 2010 showed the country’s budgetary deficit of around 13 per cent to be twice as high as initially assumed. The major rating agencies lowered their ratings for Greece. The interest on loans taken out by the Greek government rose in spectacular fashion. This triggered speculation against the euro and the currency dropped in value.
On 11 February 2010, Herman Van Rompuy, the new President of the European Council, convened his first summit in the Brussels Solvay Library. The heads of state and government adopted a declaration from which could be inferred that they would not abandon Greece to its fate. Concrete agreements on a bailout were, however, not made.
Greece was put under strong pressure to work out its own plans to solve the debt crisis. In the following weeks the Greeks would table drastic measures, which resulted in major domestic protest. But the Greek authorities dug their heels in: VAT went up, wages were reduced and authorities made big cuts in personnel.
Other Member States, particularly Germany, strongly criticised Greece. The wasteful Greeks were blamed for having lived for years beyond their means and for having falsified their statistics. It was also said that perhaps they should never have been allowed to join the euro zone in the first place. Germany invoked the treaties to state that a bailout was not actually possible. There was even more confusion on financial markets as there was ever declining trust in the vague commitments with regard to aid. It became increasingly difficult for Greece to tap capital.
On top of all this Germany’s Federal Chancellor, Angela Merkel stated on 17 March that a mechanism should be introduced to exclude from the euro zone countries showing insufficient budgetary discipline. Ahead of important federal state elections she did not want to create the impression that the Germans would have to pay off Greek debts.
One week later, on 25 March, the European leaders met for their spring summit. In an attempt to calm financial markets, they agreed a rescue plan for Greece but details were vague and the plan required the consent of all Member States. The financial markets were not impressed and it remained very difficult for Greece to find capital. In the meantime, there were rumours that other countries such as Spain, Portugal and Ireland were having to contend with similar problems.
At the same 25 March summit a Task Force on Economic Governance under the leadership of Herman Van Rompuy was created. The Task Force, consisting mainly of ministers of finance was charged with proposing ways to avoid future debt crises.
In April and May, when it became clear that Greece could not possibly overcome its debt crisis without help, agreement on an aid package was reached. The first amount mentioned was 30 billion euro, which the other member states would lend Greece under favourable conditions. This amount swiftly rose to 80 billion euro but even this had to be raised. Eventually a Financial Stability Fund worth 440 billion euro was created to help distressed economies. So, if need be, other countries could call on this rescue fund. The IMF also made funds available. The main agencies gave the European rescue fund the best possible rating of triple A.
It is, however, not clear if Greece’s acute problems are over. Some economists maintain that in the medium run the country will need to adopt drastic measures. Nor is it clear if other countries will have to make use of the emergency fund. Late in September there were rumours that Ireland was about to ask for support.
The full article can be downloaded by using the pdf button at the top of the page.
Table of Contents
Monetary union but no economic governance
The Greek debt crisis dominates the 2010 agenda
Challenges on several fronts:
- Structural measures: Europe 2020
- Financial regulation
- Budgetary discipline
Conclusion
Hendrik Vos (Mechelen, 1972) studied Political Sciences at Ghent University where he became a professor at the Department of Political Sciences in 1999. He is currently professor and director of the Centre for EU-Studies. His research specialises in decision-making and current developments in the European Union. He has published many books and contributions in renowned professional journals and regularly takes part in international conferences. Hendrik Vos is a much asked commentator on EU affairs in newspapers and on radio and television.
This project has been funded with support from the European Commission.
This article 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.