"Economic governance – update on the state of play
President Van Rompuy has recently informed you about progress made by the Task Force under his chairmanship. Work has advanced on some issues, notably on the European Semester. On other issues, such as reinforced budgetary surveillance and a new macroeconomic surveillance framework, more ambition is required. Both for the ECB and for euro area governments, the central objective must be to achieve all that is necessary to ensure the smooth functioning of our monetary union.Bearing in mind the preceding post, it must surely reinforce the call:
Once the European Commission has presented its legislative proposals, the European Parliament, as co-legislator, will have the responsibility of designing an effective framework for economic governance. The negotiations over the supervisory package have demonstrated that the Parliament is not willing to accept compromises based on the “lowest common denominator”.
Ideally, a ‘quantum leap’ in strengthening EU and euro area economic governance would require a Treaty change. This means that, short of an immediate or rapid Treaty change, we have to exploit to the maximum all the possibilities for EU secondary legislation under the current Treaty to achieve this ‘quantum leap’. The ECB counts on the support of the Parliament in its belief that the appropriate reform of economic governance – especially of the euro area – needs to exploit to the full the scope offered by the Lisbon Treaty.
ECB Board member Lorenzo Bini Smaghi has recently presented to you our position on the various aspects of economic governance reform, including a number of important issues related to crisis resolution. He has also outlined the economic rationale underlying our position. Let me today stress what we consider to be indispensable elements of a reformed framework of fiscal and macroeconomic surveillance, which is the centre of ongoing discussions.
The new framework should be well targeted, notably on countries with high debt levels and significant losses of competitiveness. Public debt levels, as well as the evolution of deficits, can be a source of financial instability and contagion across countries sharing a common currency. So, debt should receive a reinforced status in budgetary surveillance, in both the preventive and corrective arms of the Stability and Growth Pact. I am concerned that substantial progress is still needed to give public debt the prominent role it has in the letter of the Treaty.
Progressive losses of relative competitiveness within the monetary union are another source of severe instability. A new system of surveillance to check and correct macroeconomic imbalances where they are emerging is needed. This idea has garnered support in principle, but concrete measures to make it operative and sufficiently binding are still to be agreed.
Once imbalances and vulnerabilities have been identified, there must be effective follow-up, including dedicated country missions, specific policy recommendations, increased public peer pressure and eventually a set of clear adjustment measures. Since the vulnerabilities of any one member can have direct effects on other members, this surveillance framework must be supported by a graduated system of incentives and sanctions, which can be activated sufficiently early in the process and which should be commensurate with the severity of the infringement.
Indeed, a core, absolutely indispensable, element of an effective surveillance mechanism is a functioning mechanism of incentives and sanctions – both financial and non-financial – in particular for the countries in the monetary union. I am sure that the Parliament will adopt an ambitious stance on this matter.
The relevant procedures should be “quasi-automatic”, based on Commission proposals rather than recommendations. The ECB has proposed a reversal of the voting procedures that lead to the adoption of incentives and sanctions. Such decisions would be considered adopted unless a qualified majority in the Council were to vote down the Commission proposal. The role of the Commission would therefore be significantly strengthened.
Moreover, in order to internalise the requirements of membership in monetary union, the European rules need to be “owned” by the Member States. Strong national fiscal frameworks, including the creation of independent monitoring institutions and the adoption of national fiscal rules that reflect the requirements of the Stability and Growth Pact, are essential steps in this regard.
Surveillance cannot be effective unless it can rely on complete and accurate statistics. We call for a strengthening of the duties and powers of the European Statistical System, and a reinforcement of the mandates for data collection, adequacy of resources, accuracy and relevant auditing. Changes must go beyond the recent Council Regulation on Eurostat, which focuses on statistics for the excessive deficit procedure.
Crucially, the independence of analysis, judgement and surveillance should never again be put into question. I expect that the Commission will come forward with concrete proposals for governance reform to address this issue. To reinforce independent fiscal monitoring and assessment further, the ECB is also in favour of an advisory body of “wise men and women” at EU level, who would provide a “second opinion”.
To summarise, the “checklist” for a review of proposals for euro area governance would be affirmative answers to the following five questions:
We will follow very closely during the next days the responses to those questions given by the Van Rompuy Task Force on the one hqnd, and by the College of the Commission on the other hand. I hope that they will be up to the crucial challenges at stake. If it were not the case, and if the responses were too timid in our opinion, we would make clearly the point and inform your Committee." (my emphasis)
- First, does the fiscal surveillance framework effectively address the weaknesses that might give rise to a future crisis?
- Second, is there a macroeconomic surveillance framework that can trigger effective adjustment of imbalances, of external indebtedness and of losses of competitiveness?
- Third, are the enforcement mechanisms of fiscal and macroeconomic surveillance quasi-automatic and the enlarged sanctions sufficient to protect other members and the monetary union as a whole?
- Fourth, does the framework include appropriate independence in surveillance, and impeccable quality checks of analysis and statistics?
- And finally: are the new principles of economic governance anchored within national frameworks?
Come in Number 11, your time is up.