Economic Governance


In March of this year Europe's heads of state and government will decide on whether to adopt the "Competitiveness Pact" that was jointly proposed by France and Germany on 4 February. The pact, often discussed under the heading of "economic governance", seeks to promote greater cooperation between EU states by means of – to quote the German Chancellery – "harmonised conditions in national markets and systems", with the ultimate aim of bolstering the competitiveness of the EU's economies.

The pact thus goes far beyond the monitoring of member state budgets through an economic coordination body known as the "European Semester", which was approved last year. Article 136 of the Lisbon Treaty is cited as a legal basis for the pact. According to the article, the European Council may set out economic policy guidelines for euro-zone members in order "to ensure the proper functioning of economic and monetary union". Despite this explicit reference to the common currency, it is of great importance to the German government that EU member states without the euro, such as Poland and the United Kingdom, join the pact.

The term "economic governance" is a loose one, open to a wide range of interpretation. Proponents of the pact see an opportunity to advance the economic integration of the EU, which has stalled in recent years. It is said that the formulation of common economic policy will help to avert crises such as Europe's ongoing sovereign debt crisis, which is a product of fiscal mismanagement by certain member states. Critics, by contrast, fear a number of undesirable outcomes, including the end of healthy competition between member states in various areas of policy, such as tax law; the disempowerment of national parliaments, which would lose considerable control over budgetary policy, one of their most important competencies; as well as a decline in the independence of the European Central Bank.

Two questions are of key importance in assessing the proposed pact. First, what concrete measures will be taken to influence which organs of government otherwise subject to sovereign control? Second, how will reasonable harmonisation goals be enforced?

Various areas of policy have been identified as possible targets of harmonised economic governance, including public debt, tax rates, pension systems, and unit labour costs. Yet the mechanisms by which harmonisation is to be attained must be selected carefully. It makes much sense to induce other countries to contain their fiscal deficits, yet deficit reduction is just as necessary as the need to reform pension systems to prepare for demographic change. Although there is little evidence in favour of using the German "debt brake" or a similar concept as a policy tool in other countries, implicit pension obligations should not be forgotten in the discussion of public debt management. With regard to tax policy, caution is needed. Politicians in countries with high tax rates are quick to levy the accusation of "unfair tax competition", even at countries which delegate certain responsibilities to the public sector or which provide government service more efficiently, and therefore don’t need to raise as much revenue. With regard to wage policy, it is unclear how harmonisation could be achieved. In Germany, for example, companies and unions have the constitutional right to collectively set wages, free from government intervention. What options for action would the German government have if the EU ruled its wage growth was too low? Would Germany be compelled to drastically increase civil-servant pay?

Statements released thus far regarding the pact have been conspicuously silent with regard to its practical enforceability. No discussion has taken place concerning the potential for any type of sanctions. Yet without effective sanction mechanisms, the Competitiveness Pact will suffer the same fate as both the Stability and Growth Pact and the Lisbon Agenda. In the absence of strong enforcement, the pact will represent another instance of well-meaning policy lacking the teeth to be effective.