Sarkozy set for battle over economic governance

Nicolas Sarkozy loves to tease. On his visit to Brussels last week the French president revealed that he has plans for "economic government" in the eurozone. But, he told his captivated audience, he would keep them under wraps until after the June summit which will sketch out a deal on a new treaty.

"I can announce to you an initiative on the Eurogroup, on economic governance to make progress," he said, adding: "It would not be sensible to announce it before a European Council which already has a very heavy agenda."

But Sarkozy, a former finance minister, has made clear his chief concerns for the eurozone. He points to the strength of the euro against the dollar and its effect on exporters like Airbus as proof of a general need for greater political input from finance ministers as a counterweight to the European Central Bank (ECB)’s control over monetary policy. Sarkozy vehemently rejected suggestions that he is challenging the independence of the ECB. But he insisted that ministers had the right to discuss monetary policy and exchange rates: "I have to contest the idea that if you’re a minister you don’t have the right to talks [about such things]."

The idea of strengthening economic governance within the Eurogroup, the finance ministers of the eurozone, is not new but has always come up against political barriers. The main objections concern the need for greater economic co-ordination at all, with the more hawkish members of the eurozone like the Netherlands insisting that the discipline of the Stability and Growth Pact in terms of reducing debt and deficits while bearing down on inflation should be enough to induce countries to conduct prudent economic policies at national level.

Jean Pisani-Ferry, director of Bruegel, an economic think-tank, believes that the first stage will be a discussion of whether "economic governance" makes sense at all. Some eurogroup members, such as Austria and the Netherlands, have carried out structural reforms while reducing their deficits and may contest the need to boost co-ordination.

Sarkozy has expressed concern over the strength of the euro, not only against the dollar but also against the yen and the Chinese yuan. The fact that the yuan does not float freely but trades within a tight band, is seen as giving China a competitive advantage on exports. Pisani-Ferry says the Eurogroup or the EU Council of finance ministers, Ecofin, could take a stronger line on the exchange rate. He considers it would be appropriate for Europeans to raise the subject of the exchange rate with the Chinese. US Treasury Secretary Hank Paulson frequently raises the issue with the Chinese authorities.

Pisani-Ferry believes it would be "in accordance with established practice" for the EU to carry out "monetary diplomacy" in the same way.

The other main possibility is establishing mechanisms for ensuring better co-ordination of national budgeting procedures and of economic policy. The importance of the current broad economic policy guidelines could be strengthened. Pisani-Ferry suggests that the Eurogroup could meet at heads of state level. This would help ensure that the policy guidelines are adhered to in all policy areas to overcome the fact that finance ministers are only responsible for some aspects of economic policy but not for labour market legislation, for instance.

Pisani-Ferry admits that this would have to be done diplomatically to avoid suggestions that it was an attempt to build a core Europe based on the Eurogroup, as Belgian Prime Minister Guy Verhofstadt has suggested.

But, as Pisani-Ferry points outs, the "French have a record of calling for co-ordination and then not doing it". The best example is France’s unilateral decision in 2000 to lower VAT for restaurants and cafés.

Another way of boosting the political input of the Eurogroup or Ecofin could be to trade off greater flexibility on deficit reduction against structural reform. This appears to be the approach the new French president is taking when he asks to be judged on his record of deficit reduction at the end of his mandate when higher growth should have boosted revenues, lowering the deficit. As Pisani-Ferry points out, the reform of the Stability and Growth Pact in 2005 "opens the door" to discussion of this approach as it gives member states more time to show the effects of structural reforms.

Sarkozy faces a tough battle to win over doubters, not least if there is suspicion that he is trying to put political pressure on the ECB as part of his campaign to win back some of the competitiveness France has lost to Germany in recent years.

Nicolas Sarkozy loves to tease. On his visit to Brussels last week the French president revealed that he has plans for "economic government" in the eurozone. But, he told his captivated audience, he would keep them under wraps until after the June summit which will sketch out a deal on a new treaty.