EU needs policy reforms to make monetary union and single market work

Date: 22/01/04

LAST week's decision by the European Commission to launch proposals next month for the reform of economic governance should be welcomed as an opportunity to broaden the discussion beyond the issue of revising the Stability and Growth Pact.

Economic policy coordination has failed to make substantial headway towardsits goal of creating the conditions for higher growth, competitiveness and social cohesion. Four years after the proclamation of the "Lisbon strategy", the EU still lags behind the US in terms of competitiveness, public debt levels are rising again, and structural reforms in key member states remain sluggish.

It is a truism that primarily member states, not the European Union, are to blame for this dire state of affairs, given the EU's lack of real decision-making or spending power in key socio-economic policy fields. Yet, the EU needs to face up to its responsibility for creating the conditions to make the single market and monetary union work. A number of procedures some harder, some softer, have been set up over the past decade to coordinate and improve national policies through peer review, benchmarking, and in the case of the stability pact, supposedly fines.

But has the EU set the right priorities, does it use the instruments available coherently and are the incentives suitable for achieving progress? Our studies show that the key problem in the application of policy coordination is a commitment-implementation gap between what national ministers have signed up to in Brussels and what is actually happening when they return home.

If member states had followed more of the measures advocated, for instance, in the annual Broad Economic Policy Guidelines (BEPG) adopted by the Council of Ministers, their economic outlook would be better today.

Attempts to reform the system of economic policy coordination should be guided by a number of principles. The first is prioritizing. There have been too many proposals, which advocated too many things, with the result of fostering a pick-and-choose mentality among national administrations and reducing the clarity and accessibility of the documents.

The solution is to single out and prioritize those measures most likely to raise Europe's growth as the precondition for achieving other policy goals, such as sustainable social cohesion. Such a step would, for example, entail letting go of the aspiration to steer national active labour policies or gender equality.

The second principle is streamlining. Successive presidencies have burdened the EU with too many processes containing divergent philosophies and contradictory goals. Last year's exercise to increase the coherence between the BEPG and the European Employment Strategy has led to a clash of economic policy cultures and priorities among the respective Commission directorates-general. Such conflicts are, however, unavoidable if the EU wants to sidestep contributing to deadlock at the national level among member states' vested interests. Another way forward would be to dismantle all policy-area-specific coordination procedures in order to create a single unified structure, which sets outs a coherent set of objectives for all the treaty-based economic policy areas in the long-, medium- and short-term.

The third, and most crucial principle for reform, should be to increase levels of national ownership. Larger states don't feel bound to commitments, and often implement recommendations in a piecemeal and opportunistic fashion. This is not only the fault of governments, but is at least partly due to high veto opportunities for social partners and opposition parties in some member states.

Given that a full transfer of economic competences to the EU is neither politically feasible nor economically desirable, the current system of fostering domestic reform through peer pressure, public scolding and pecuniary sanctions should be rethought.

If one chooses to work with the stick of fines to deter member states from free-riding behaviour in the area of fiscal policy, one needs to design them in a way that makes their application credible. This concerns not only the voting arrangements in the Council, but also the type of sanction. One could, for instance, phase in fines from a low level so that national public reaction to the loss of taxpayers' money will do the trick, not the economic significance of the fine.

Experience from other policy fields shows that national media and opposition parties are quick to pick up on such measures to attack the government. As a means of last resort, provisions for non-pecuniary sanctions, such as a reduction in voting weight for a limited period should also be considered.

Secondly, policy coordination should rely more on rewarding compliance and political innovation, particularly in those policy areas which are not crucial to the sustainability of a monetary union. A significant proportion of the EU's budget could be designated as a reward for those countries that have made the greatest measurable improvements in selected policy fields, such as labour market reform or research and development.

Such rewards for relative, not absolute, performance, could be taken from the structural funds if a more radical overhaul of the budget, as suggested by last summer's Sapir report (submitted to the Commission by a group of high-level economists), should not be feasible. Practising and rewarding administrative competition would also contribute to increasing the efficiency of, and cooperation within, national administrations.

Finally, the persuasive force of economic arguments for change must be enhanced beyond prioritizing and streamlining. All too often the EU forecasts have been wrong and the recommended measures did not suffice. To bolster the economic expertise going into EU recommendations and their public impact, the high-level experts should be recruited on a temporary basis from all member states - not only for their expertise but also to explain proposals to their citizens. The Commission should also seek to form more institutionalized links with leading national economic research institutes and economic policy committees of national parliaments as the key actors in the domestic policymaking process. Only by increasing the participation of national figures will the EU be able to make an impact on the political process and national debate.

Some of these proposals would require a politically difficult treaty change. However, in times of economic and political crisis, choosing the presumably safe middle way can be the most risky strategy. Member states are facing lean times given the impact of demographic change, while the EU is institutionally badly prepared to make enlargement a success.

When Europe's leaders revisit the draft constitution, they should not only muster the political courage to agree on the double majority system, but also to revise the provisions for economic governance in order to prepare the EU for difficult times ahead.

• Christoph O. Meyer is a Marie Curie Research Fellow at the Centre for European Policy Studies For further research findings see www.govecor.org

Author, who is a Marie Curie Research Fellow at the Centre for European Policy Studies, says when EU leaders revisit the draft European constitution later in 2004 they should revise the provisions for economic governance to prepare the EU for difficult times ahead.

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