Transcript EU – Between the Nobel Prize and the

EU – Between the Nobel Prize
and the Financial Crisis
Professor Miodrag Jovanović
It all started as the financial crisis…
… and it soon turned into a political
The Rise of Eurozone
1999 Belgium, Germany, Ireland, Spain, France, Italy,
Luxembourg, the Netherlands, Austria, Portugal and
Finland
2001 Greece
2002 Introduction of euro banknotes and coins
2007 Slovenia
2008 Cyprus, Malta
2009 Slovakia
2011 Estonia
• Non-Eurozone states: UK, Poland, Hungary, Sweden,
Denmark, Bulgaria, Romania, Czech Republic,
Lithuania, Latvia
The Fate of Eurozone
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When the euro came into being, monetary policy became
the responsibility of the independent European Central
Bank (ECB), which was created for that purpose, and the
national central banks of the Member States having
adopted the euro.
Together they compose the Eurosystem. Fiscal policy (tax
and spending) remained up until now in the hands of
individual national governments – though they undertook
to adhere to commonly agreed rules on public finances
known as the Stability and Growth Pact.
They also retained full responsibility for their own
structural policies (labor, pension and capital markets),
but agreed to co-ordinate them in order to achieve the
common goals of stability, growth and employment.
Article 126 of the Treaty on the
Functioning of the European Union
1. Member States shall avoid excessive government deficits.
2. The Commission shall monitor the development of the budgetary
situation and of the stock of government debt in the Member
States with a view to identifying gross errors. In particular it shall
examine compliance with budgetary discipline on the basis of the
following two criteria:
(a) whether the ratio of the planned or actual government deficit to
gross domestic product exceeds a reference value, unless:
- either the ratio has declined substantially and continuously and
reached a level that comes close to the reference value,
- or, alternatively, the excess over the reference value is only
exceptional and temporary and the ratio remains close to the
reference value;
(b) whether the ratio of government debt to gross domestic product
exceeds a reference value, unless the ratio is sufficiently
diminishing and approaching the reference value at a satisfactory
pace.
PROTOCOL (No 12)
ON THE EXCESSIVE DEFICIT
PROCEDURE
Article 1
The reference values referred to in Article 126(2) of
the Treaty on the Functioning of the European
Union are:
- 3 % for the ratio of the planned or actual
government deficit to gross domestic product at
market prices;
- 60 % for the ratio of government debt to gross
domestic product at market prices.
EU ‘Six-Pack’
• Entered into force on 13 December 2011;
• Five Regulations and one Directive (that is why
it is called six-pack);
• EU secondary law;
• Applies to 27 MS with some specific rules for
euro-area Member States, especially regarding
financial sanctions;
• The six-pack does not only cover fiscal
surveillance, but also macroeconomic
surveillance under the new Macroeconomic
Imbalance Procedure.
Six-Pack – Fiscal Effects
• In the fiscal field, the six-pack strengthens the Stability and Growth
Pact (SGP). According to the SGP Member States' budgetary balance
shall converge towards the country-specific medium-term objective
(MTO) - so-called preventive arm - and the general government
deficit must not exceed 3% of GDP and public debt must not exceed
60% of GDP (or at least diminish sufficiently towards the 60%
threshold).
• The six-pack ensures stricter application of the fiscal rules by
defining quantitatively what a "significant deviation" from the MTO
or the adjustment path towards it means in the context of the
preventive arm.
• Financial sanctions for euro-area Member States are imposed in a
gradual way, from the preventive arm to the latest stages of the EDP,
and may eventually reach 0.5% of GDP. The six-pack introduces
reverse qualified majority voting (RQMV) for most sanctions,
therefore increasing their likelihood for euro-area Member States.
(RQMV implies that a recommendation or a proposal of the
Commission is considered adopted in the Council unless a qualified
majority of Member States votes against it.)
TREATY ON STABILITY, COORDINATION AND
GOVERNANCE (TSCG)
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Entry into force following ratification by at least twelve euro-area Member
States;
Intergovernmental agreement (not EU law);
Signed by 25 EU Member States (all but UK and Czech Republic); TSCG will
only be binding for all euro-area Member States, while other contracting
parties will be bound once they adopt the euro or earlier if they wish (they are
allowed to choose provisions they wish to comply with).
The fiscal part of the TSCG is referred to as "Fiscal Compact".
Requires contracting parties to respect/ensure convergence towards the
country-specific medium-term objective (MTO), as defined in the SGP, with a
lower limit of a structural deficit (cyclical effects and one-off measures are
not taken into account) of 0.5% of GDP; (1.0% of GDP for Member States
with a debt ratio significantly below 60% of GDP). Correction mechanisms
should ensure automatic action to be undertaken in case of deviation from
the MTO or the adjustment path towards it, with escape clauses for
exceptional circumstances. Compliance with the rule should be monitored by
independent institutions.
These budget rules shall be implemented in national law through provisions
of "binding force and permanent character, preferably constitutional".
TREATY ON STABILITY, COORDINATION AND
GOVERNANCE (TSCG) - Sanctions
• European Court of Justice may impose
financial sanction (0.1% of GDP) if a
country does not properly implement the
new budget rules in national law and fails
to comply with a ECJ ruling that requires
it to do so.
• In the case of euro-area Member States,
sanctions would be channeled to the
European Stability Mechanism, in the case
of "non-euro-area Member States", the
money would be attributed to the EU
budget.
The Fiscal Compact and ‘Six-Pack’ – Legal Issues
• The Fiscal Compact, which is the fiscal part of the TSCG - once
it enters into force - and the six-pack will run in parallel.
• On the one hand, a couple of provisions included in the TSCG
are mirroring concepts existing in the Stability and Growth
Pact as reformed by the six-pack: medium-term objectives
(MTOs), significant deviation, exceptional circumstances.
• On the other hand, some provisions of the TSCG are more
stringent than the six-pack. For example, it says that at each
stage of the Excessive Deficit Procedure (EDP) euro-area
Member States will support the Commission's proposals or
recommendations in the Council if a "euro-area Member State"
is in breach of the deficit criterion, unless a qualified majority
of them is against it. In practice this means that if a "euro-area
Member State" breaches the deficit criterion a kind of reverse
qualified majority voting (RQMV) applies to all stages of the
EDP, even if not foreseen in the six-pack.
Situation on the ground
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During the recession (2009), most of European countries
exceeded the permissible limits and were subject to the
excessive deficit procedure. Only three countries managed
to escape it: Estonia, Luxembourg and Sweden. On 12 July
2011 they were joined by Finland.
On 22 June this year, European Union finance ministers
(Ecofin), in accordance with the recommendation of the
European Commission, decided to abrogate the procedure
against Bulgaria and Germany.
On 7 November, the European Commission recommended
the abrogation of EDP against Malta whose deficit fell to
2.7% in 2011 and will amount to 2.6% of GDP this year.
EU as a two-tiers polity?
• Has the crisis created a two-tier EU with the insiders,
the 17 Eurozone countries, driving decision-making,
while the 10 Euro "outs" are not even in the room?
• The situation is even more complicated, since the UK
was the only non-Eurozone country to explicitly
oppose the new ‘Fiscal Compact’
• Richard Corbett, adviser to Herman van Rompuy, the
European Council president, says most policy "will
remain for the 27: the single market, rules on
consumer protection, competition, trade and other
areas like environment or justice and home affairs".
BVerfG’s ruling on the Fiscal Compact
• Germany's Federal Constitutional Court
has rejected a lawsuit brought by
opponents of the euro, and has set only a
few conditions for the ratification of the
European Stability Mechanism and the
fiscal pact.
• The main proviso is that the ESM cannot
increase the scope of Germany's liability
without the country's agreement.
‘Fiscal Compact’ as a road to the
European state?
Indicative terminology:
“qualitative moves towards a genuine ‘fiscal
stability union’ in the euro area”; “a
strong economic pillar is indispensable”;
“fiscal discipline and deeper integration”;
“social cohesion”; “fiscal integration”; “a
common economic policy”
Does this step constitute an ultimate loss of
national sovereignty?
Latest Developments – EU Banking Union
• EU finance ministers have agreed a landmark deal
establishing the European Central Bank (ECB) as the
single supervisor of the European banking sector,
beginning in 2014.
• Under the final compromise, which is expected to
encompass around 150 banks, at least three banks from
each member state will fall under the regime alongside
all banks with assets worth €30 billion or more or 20
percent of national GDP.
• Ministers agreed that a 'double majority' of countries
both in and outside the eurozone would be required to
make decisions.
• Although Spain and other countries would like bank
bailouts to begin in early 2013, Germany is against this
happening before the supervisory regime is in place and
fully operational.
Financial crisis and the future of
EU
Does this episode demonstrate that the EU can
survive only by strengthening the competences
of the full-fledge state?
Questioned about a move towards a more federal
Europe, 64% of people polled in Spain and
49% in Greece said they would like to see
further powers centralized, while only 36% of
Germans and 35% of French agreed.