Year XLVI, 2004, Number 2, Page 68
Economic Policy in the European Constitution
ALBERTO MAJOCCHI
1. A Global Assessment of the Draft Constitution.
In order to arrive at a correct assessment of the draft Treaty establishing a Constitution for Europe, agreed by the European Council on June 18th, 2004, one must first establish the criterion on which such an assessment can be based. The criterion adopted here is that of the adequacy of the reforms contained in the text of the Treaty to solve the fundamental problems that, in today’s world political situation, face the Union in the wake of its enlargement (adaptation of its institutions, economic governance). On the basis of this criterion, it is possible to appreciate the reasonableness of certain opinions — albeit opposing ones — that have been formulated in relation to the draft Treaty, but also their partial nature.
Generally speaking, the draft Treaty produced by the European Convention was greeted with enthusiasm, even though Tommaso Padoa Schioppa, in an editorial published in the Corriere della Sera on June 19th, 2003, was somewhat critical. Indeed, the title of his piece (Giscard’s Camel), was an explicit reference to a saying whereby a camel is “a horse designed by a committee”. Padoa Schioppa’ s main criticism of the draft Treaty was that it failed to extend the majority vote as the general rule. Although the position he expressed can, to a great extent, be shared, it must also be modified in order to take into account the fact that the new Treaty should have attempted to address two different problems: on the one hand, it should have sought to rectify the omissions of Nice, that is, to institute the reforms needed in order to ensure the efficient working of a 25-member Union, each of whose members have equal competences and responsibilities, and on the other, it should have endeavoured to create a Union capable of rising to the challenges that Europe now faces, and which concern, in particular, the question of economic governance in a setting of protracted global economic crisis, and, following the war in Iraq, the management of a common foreign and security policy.
Extremely succinctly, the constitutional Treaty can be assessed as follows: although the European Convention tackled in a mainly positive manner the problems of managing the enlarged Union, it proved incapable of instituting the institutional reforms needed in order to rise successfully to the challenges that now face the Union. As regards the first of these two points, progress was undoubtedly made in the draft Treaty; but here our intention is to analyse in greater depth the second of these aspects, an analysis that leads us to affirm, quite simply, that the institutional innovations contained in the draft Treaty are not enough to give rise to a Union that is able to conduct independently either its own economic policy (in particular fiscal policy), or a common foreign and security policy that is more than just the lowest common denominator of 25 national foreign policies.
In reference to the management of economic policy, the constitutional Treaty in Article III-179(1) re-affirms the principle — already embraced by the Maastricht Treaty — that “member states shall regard their economic policies as a matter of common concern and shall coordinate them within the Council”, and in Part III reiterates the principle that decisions relating to fiscal policy must be taken unanimously. In the field of foreign and security policy, provision is made for the creation of a Union Minister for Foreign Affairs who will be required to manage the common policy developed by member states through the convergence of their actions: however, no provision is made for guaranteeing autonomous foreign policy decisions in situations in which this convergence is lacking, or, as seen in the case of the war in Iraq, in which there emerge two opposing factions. In such situations, the Minister for Foreign Affairs must simply note these divergences and the fact that the Union lacks the power to implement, autonomously, a policy of its own.
There thus exists a basic parallelism: in these two areas, both crucial to the future of the Union, a confederal approach continues to prevail and all that is envisaged is a “common” policy managed through a coordination method and through unanimous decisions. In short, there does not as yet exist a proper European policy, but rather a summation — at best coordinated — of different national policies. It is certainly possible that there will be, in time, an evolution towards a truly European foreign and economic policy, but there can also be no doubt that, in this sphere, what the European Convention produced looks far more like a camel than a horse. In fact, it should be underlined that the weaknesses of the constitutional Treaty are actually even greater than Padoa Schioppa suggests, given that a generalised extension of the majority vote, while necessary, is still not enough to guarantee a European economic and foreign policy. In particular, the management of economic policy, and of foreign and security policy, is not assigned to a supranational body — the Commission, the embryo of the future European government —, but is left in the hands of the Council. Consequently, even had the draft Constitution envisaged the extension of the majority voting rule to these areas, this move, while certainly an important innovation, would not have constituted a decisive step forwards, because for as long as the Council — which is to say the governments — retains its ultimate decision-making power on matters where national interests are at stake, the right of veto will continue to hold sway.
The fact is that the President of the Commission (and even more so the Minister for Foreign Affairs, who is one of its vice-presidents), despite being elected by the Parliament by qualified majority, is still appointed by the heads of state and of government. Therefore, not being directly elected by the European people (and not reflecting their preferences), he/she lacks the political authority and power to govern key areas of European life, such as foreign policy and economic policy. It thus seems clear that if Europe is to be able to meet effectively the enormous challenges now before it — contributing to the defining of a new balances of power in the world and managing economic and monetary union in pursuit not only of the objective of stability, but also in accordance with the goal of sustainable growth, following the guidelines established at the Lisbon summit — what is needed is an institutional leap forward, the creation of a direct link between the will of the European people and Europe’s decision makers. What is needed, ultimately, is the creation of an out-and-out federal state in which the European Commission is the executive power, a government elected using a democratic system that takes into account the results of the European elections, and in which the Council of Ministers is merely a legislative organ: a second chamber, there to assert the interests of the various member states without blocking the decision-making process, and to guarantee correct application of the principle of subsidiarity.
In truth, the European Convention fulfilled the mandate conferred on it at Laeken, which was, essentially, to draw up a draft Treaty acceptable to all the EU member states. Today, the Union’s 25 members can, albeit with difficulty, reach unanimity on how to manage the acquis communautaire in this enlarged setting; but this unanimity is destructive if the objective pursued is the gradual transformation of the Union into a federation with limited, but real powers in sectors that should, on the basis of the principle of subsidiarity, be Europe’s responsibility. And that is not all: in reality, many consider that it is unrealistic, in today’s political climate, even to refer to this objective as the inevitable outcome of the process of European unification, given that there are countries that are opposed to any federal evolution of the process and that prevent the reaching of unanimous decisions on federal solutions.
2. A Theoretical Contribution to the Definition of the Hard Core.
The analysis, at this point, may be facilitated considerably by a few simple considerations, using the tools of political economy. The question is this: given that the intergovernmental conference, on the basis of the results of the work of the European Convention, seems to have managed (uncertainty over the final outcome of the ratification process apart) to define a constitutional framework for managing the acquis communautaire in a 25-member Union, is it now possible to imagine a Europe of concentric circles, with a federal core (made up of those countries willing to accept further reductions of their sovereignty in order to manage foreign and security policy and economic policy efficiently at European level) inserted in the framework of a broader confederation (with 25, 27, 28 or 30 members), whose role is merely to manage the acquis communautaire, and without any further relinquishing of sovereignty on the part of the member states that are not part of the hard core? The economic theory of federalism seems to offer useful pointers that might help to answer this question, because the creation of a Union — and thus the transfer of sovereignty from the states to the Union — is justified by the existence of important external effects and major economies of scale, whereas the conferring on the Union of specific competences becomes more difficult when there exists a marked heterogeneity of preferences. It was with this in mind that von Hagen and Pisani-Ferry [2003], for example, remarked that responsibility for foreign and security policy should be transferred to Europe in order to guarantee internalisation of the spillovers and full exploitation of the economies of scale; but it can also be seen that such a transfer of competences is complicated, in Europe, by the member states’ widely differing preferences on the management of these areas.
From a theoretical point of view — and here we refer to the theory of the clubs, in which the emphasis is placed on the need to determine simultaneously not only the role, but also the size and composition of the club — it is possible to find a way out of this dilemma. This is providing that the preferences are not regarded as exogenously imposed, but rather as endogenous — along the lines indicated by Alesina and Grilli [1993] — hypothesising a Union of variable dimensions. The question has been addressed theoretically by Bordignon and Brusco [2003], who considered the possibility of using the instrument of enhanced cooperation, whereas Alesina, Angeloni and Etro [2003] envisaged a model of a Union in which the trade-off between the benefits of internalisation of the spillovers and the sacrifices linked to the loss of autonomy in policy management determine, endogenously, the “size, composition and scope of the Union”. In accordance with this line, it is possible to justify, as efficient, the choice of a Europe of concentric circles, in which there is an initial group of countries — the hard core — that can enjoy not only the benefits deriving from the internalisation of external effects and economies of scale, but also a relative homogeneity of preferences, which might together lead them to accept a welfare-enhancing federal solution, and a second group of countries, whose preferences are more heterogeneous compared with those of the hard core, that can, at the same time, go on enjoying the benefits deriving from their exploitation of the acquis communautaire and retain a considerable margin of autonomy in the management of other policy areas. In political terms, this solution has already been outlined, by President Mitterrand, re-proposed in the Schäuble-Lamers project, and developed by German foreign minister Fischer in his speech at the Humboldt University in Berlin. But nowhere in the work of the European Convention was this hypothesis seriously entertained. It thus remains to be seen whether some countries might prove capable of reviving it as a means of finding a way out of the impasse that is created between those who wish to move towards extension of the majority vote as the general rule and the progressive building of a European economic and foreign policy and those who instead oppose the federal solution and are not willing to accept further reductions of their sovereignty.
3. Ratification of the Constitutional Treaty.
The new Constitution can come into effect only when, upon completion of the relevant procedures in each country, it has been ratified by all the member states. The possibility that the Constitution may not be ratified has clearly increased in proportion to the increase in the number of countries called upon to take this formal step. With regard to the ratification of the Treaty, a Declaration annexed to the Final Act of the Intergovernmental Conference states that “if, two years after the signature of the Treaty establishing a Constitution for Europe, four fifths of the member states have ratified it and one or more member states have encountered difficulties in proceeding with ratification, the matter shall be referred to the European Council”.
In fact, what this clause implies is that the choice is, ultimately, a political one. This offers an opening to those member states that are convinced of the need to work towards the completion of the Union’s transformation into an out-and-out federation, and should encourage them to fight for an extension of the majority vote as the general rule (at least in relation to the creation of new resources to fund a European policy promoting an enhanced rate of economic growth) with a view to the creation of a “hard core” that will promote the institution of a European government with responsibility for economic policy and, subsequently, foreign and security policy, with all that that implies in the defence sphere. This hard core could thus ratify the Treaty — thereby clearly interrupting the legal continuity of the Union —, in the full awareness that some of the member states, which will of course remain part of the Union with all the attendant rights and duties, will not initially be willing to be part of the hard core, but will be unable to prevent its formation if the Council decides that the entry into force of the Constitution (and subsequent amendments of the same) can be decided not by unanimity, but upon the consensus merely of those countries that wish to adopt it (and, thus, wish to proceed along the path that will lead to further relinquishing of their national sovereignty).
The battle, therefore, is not over and the choices that must be made during the ratification process are important, providing there indeed exists the will on the part of a group of member states — and in particular on the part of the Six founding members — to move towards the progressive creation of a federation capable of promoting the development of Europe’s economy and of making Europe’s influence felt in the creation of a new, multi-polar world order, which is the indispensable condition for promoting peace and balanced global economic growth.
4. The Limitations of the Stability Pact and the European Action for Growth.
In the area of economic policy, the most striking problem recently to emerge has been the general slowing down of the European economy. This has prompted, in many countries, widespread debate on the need to revise the Stability Pact, given that the effects of automatic budget flexibility have upset the balance of state finances, particularly in the larger countries, and given that it has become increasingly difficult — not least from the point of view of retaining political consensus — to respect the constraints imposed by the Pact.
Indeed, according to the terms of the Maastricht Treaty, member states are required not to exceed a budget deficit the equivalent of 3 percent of their Gdp. This limit was imposed in order to offer the other members of the monetary union protection against negative external effects. But when a single country is hit by an asymmetric shock, the automatic adjustment mechanisms provided for by the “optimum currency areas” theory (wage flexibility, mobility of labour, the existence of a substantial federal budget) do not, within the European Monetary Union, operate effectively. As a result, in the presence of such a shock, automatic flexibility of the budget of the country affected is the only adjustment mechanism that remains: when the Gdp falls, so does revenue, whereas expenditure — one need only think of social security costs — increases as a result of the worsening economic situation. The Stability Pact thus established — correctly from this point of view — that if the revenue stabilising mechanisms based on automatic variation of the budget deficit are to work correctly, while also ensuring that the budget deficit does not exceed the 3 percent limit, then the budget must initially be balanced, or even record a surplus. If this requirement is fulfilled, a budget deficit equal to or greater than 3% allows the recession to be tackled with an expansionary fiscal policy while at the same time complying with the constraints of the Maastricht Treaty.
But the Stability Pact also presents considerable limitations, in that it states that only in exceptional circumstances (particularly severe recession, characterised by an at least 2 percent reduction of the Gdp in real terms) can the 3 percent budget deficit limit be exceeded; and that even in such a situation the exceeding of the ceiling must be temporary: indeed, the deficit must be brought back within the 3 percent limit as soon as the period of severe recession has been overcome. If the breaching of the 3 per cent rule is not justified by a situation of severe recession, the Council, having noted the existence of the excessive deficit, formulates a recommendation for its correction, to be completed (unless there are other special circumstances) within the space of a year. This means that if a country starts off with a balanced budget or with a budget surplus, the margin of automatic flexibility can be used to guarantee an adequate anticyclical economic policy; but if, on the other hand, it starts off from a situation in which a balanced budget is still a distant objective that can be achieved only in time, then the effects of automatic stabilisation immediately push it over the 3 percent limit, particularly if the recession is not severe (and thus not exceptional in character), but instead protracted. In this case, the Council must formulate a recommendation that sets out the measures to be taken in order to return below the 3 percent limit, thus effectively promoting a pro-cyclical economic policy.
The application of the Pact has negative consequences of two types:
a) given that governments, too, abide by the principle primum vivere, deinde philosophari, corrective measures — basically, reduced spending and increased taxation — in a situation already characterised by factors of recession, either are not applied or, if they are applied, generate, in addition to negative (pro-cyclical) effects, a reduction of consensus that has repercussions not only on the governing political class, but also on the process of European integration;
b) in order to avoid these effects, the recommendations on the corrective measures to be taken tend to go unheeded. This undermines the Pact, the credibility of which should instead be preserved, given that it serves to strengthen the culture of stability introduced by the Maastricht Treaty.
Because of these limitations, numerous reforms of the Stability Pact have been proposed. First and foremost, the recent Ecofin decisions, which states that reference must be made to the structural budget when determining adherence to or failure to respect the ceiling (i.e., to the deficit corrected for the effects on the budget of cyclical fluctuations), had the effect of loosening the constraints of the Pact. But the most widespread proposal concerns application of the golden rule, that is the exclusion of public investments from the budget balance. This would naturally allow the member states to adopt expansionary measures and, in particular, to fund, through deficit, investments in the creation of infrastructures. However, this solution, too, presents many shortcomings, given that:
a) the definition of public investments is highly ambiguous, a fact that may allow states to get round the terms of the Pact by including current expenditure under the heading investments;
b) this type of measure favours investments, which can be funded through deficit, over current expenditure, even though the latter might, in some cases, be more productive (in the education sector, for instance, it might lead to the building of new schools rather than the recruitment of new teachers);
c) but the biggest shortcoming derives from the fact that within the single market the expansionary effects of increased expenditures at national level tend to be reduced by the large leakages, through import, from the income circuit; this, in turn, reduces any multiplier effects, on incomes, of changes induced in the purchasing of domestic goods. In the presence of positive external effects that benefit those countries that belong to the European Union but do not conduct expansionary policies, the production of “stabilisation” in each country thus tends to remain at sub-optimal levels.
In order to overcome these problems and at the same time to guarantee the re-launching of the European economy and adherence to the terms of the Stability Pact, a hefty programme of public investment, able to strengthen the single market and bolster demand in the current phase of economic stagnation, needs to be managed effectively at European level. It is not a question of coming up with something new: a similar project, usually referred to as the “Delors Plan”, was developed more than ten years ago by the European Commission [1993]. This plan set out, first and foremost, a broad programme of public investments conceived not only as a means of sustaining demand in a period of economic slowdown, but also as an instrument for strengthening the European economy. Furthermore, the Delors Plan advocated a shift away from a fiscal model based mainly on the taxation of labour — particularly unskilled labour — towards one based on the taxation of energy, so as to create a model of sustainable growth not only on a social but also on an environmental level.
A re-launching of the Delors Plan, in an updated form that sets out not only to stabilise the European economy but above all to set in motion the realisation of the Lisbon strategy, thus appears to be on the agenda. Basically, it is a question of promoting, at European level, a coordinated plan of infrastructural investments — material and immaterial — capable of filling the infrastructural gap created in many EU countries by application of restrictive economic policies (first in order to meet the parameters of Maastricht and subsequently in order to respect the terms of the Stability Pact) and at the same time of increasing competitiveness and of favouring the launch of a model of sustainable growth. Initially, this plan could include:
a) investments in the completion of European transport, energy and telecommunications networks;
b) a plan for research and development expenditure, to boost the competitiveness of European firms;
c) the funding of a series of projects designed to improve the quality of life of EU citizens (sustainable mobility, clean water supplies, clean and renewable energy sources, etc.);
d) investments in conserving and promoting the use of cultural heritage.
An initiative along these lines was launched by the Italian government, which placed a European Action for Growth plan at the top of its programme for Italy’s six-month presidency of Ecofin. The success of this plan depends on three conditions:
a) that it is a truly European plan, in other words, the main instrument of a European economic policy designed to promote growth;
b) that it is sufficiently far-reaching, making provision for public investment in infrastructures, material or immaterial, to the value of around 0.5-1 percent of the European Gdp;
c) that it is able to give out a strong positive signal capable of restoring a climate of confidence among families and industry.
Despite Ecofin’s ratification, it is difficult to imagine what the future might hold for this plan. What is certain, however, is that it marks an important turning point: after a decade in which it was asserted that there can be no growth without stability, it has finally been realised that there can be no stability without growth.
5. Europe’s Lack of a Role on the International Stage.
In today’s globalised world, Europe finds itself with an increasingly minor role to play. Whereas the United States, following the collapse of the bipolar world order, is playing the part of a superpower with hegemonic ambitions (supported in this endeavour by a fast-growing economy) and the world’s developing regions are making their presence felt on the international stage hitherto occupied solely by the industrialised nations, Europe, despite recent advances, is being pushed increasingly to the fringe of world government. As a result, “euro-pessimism is back”. Indeed, it was with these very words that Faini (2004) opened a recent paper on the decline of Europe. In fact, in spite of the successful completion of monetary union and of the process of Europe’s enlargement to include ten new countries, a climate of pessimism reigns throughout the continent.
And yet even a rapid glance at the key events of the past fifteen years is enough to show that this pessimism is not only unwarranted but also, in many ways, surprising. In 1989, following the collapse of the Berlin Wall, it was generally felt that the “global village” was moving inexorably towards a future of peace and progress. In this setting, France obtained (in return for giving Germany’s re-unification the go-ahead) German approval of the monetary union plan, which brought to an end the long process, begun with the Delors Plan, of completing the single market. In 1992, the Maastricht Treaty indeed set out the stages for the creation of the European currency, and fixed January 1st, 2002 as the date on which these different stages would be concluded with the introduction of the euro on to the market. At the same time, negotiations were begun for the enlargement of the European Union to the countries of central and eastern Europe, a process that was destined to end with the entry of ten new member states, including Cyprus and Malta, on May 1st, 2004.
The outlook for the new millennium thus looked extremely positive. Then, on September 11th, 2001, everything was suddenly turned upside down by a shocking terrorist attack that struck the United States of America on its own territory and triggered a political phase characterised by the emergence of strong tensions, reflected in a re-opening of conflicts in various parts of the world. In actual fact, in the previous decade, war had, tragically, also returned to European soil: from April 1992 to December 1995, the Balkan peninsula was rocked by the bloody conflict that ended up by destroying Bosnia-Herzegovina, and the period from March to June 1999 saw NATO intervening in Kosovo to free the Albanians from the grip of the Serbs. This crisis, unfolding in such close proximity to Europe, exposed with extreme clarity both the instability of the equilibrium resulting from the end of the bipolar era, and Europe’s total incapacity to deal autonomously with tensions arising in a territory lying right on the edge of its own area of influence. The new millennium thus opened with a series of increasingly violent conflicts, ranging from Afghanistan to Iraq, which have involved the entire world community and fuelled a situation that is destined to increase further the risk of a spread of terrorism.
In this setting, Europe’s lack of any real capacity to make decisions in the spheres of foreign and security policy, leaving the weight of such decisions solely in the hands of the President of the United States, has influenced significantly the development of international relations. Indeed, whereas Europe proved able to conduct — through the tried-and-tested mechanisms already used in the past for previous enlargements — a common foreign policy resulting in the entry into the EU of the new countries of central and eastern Europe, its lack of efficient decision-making mechanisms has prevented it from influencing, for instance, efforts to find a solution to the problems of the Middle East, and in particular to the ongoing Israeli-Palestinian conflict, and above all from playing an active role over the war in Iraq, which saw the European states split into two opposing factions.
Many commentators underline this fact to illustrate the impossibility of Europe’s playing a role in international politics, given the heterogeneity of preferences across the various European countries. But this argument misses the crux of the whole question, which is instead linked to the Union’s institutional model. In fact, the draft Constitution approved by the meeting of the European Council in Brussels on June 18th, 2004 reads (Article III-295(1): “The European Council shall define the general guidelines for the common foreign and security policy, including for matters with defence implications”; and Article III-300(1) specifies that “European decisions referred to in this Chapter shall be adopted by the Council of Ministers acting unanimously”. It is clear that no common European foreign policy is ever likely to emerge while this decision-making structure is in place; indeed, even the United States would find itself in similar difficulties should its foreign policy decisions have to be reached unanimously following negotiations within the Senate, in which all the member states are represented!
6. Europe’s Economic Decline.
While the recent evolution of international relations highlights clearly, on the one hand, the difficulties the United States faces in attempting to establish its hegemony on a global scale and, on the other, the difficulty of initiating a new world order in which the European Union plays a decisive role, Europe, at the start of this new millennium, is also faced with another source of difficulty: the re-emergence and widening of the gap that separates it from the United States economically. The technological gap favouring the American economy is clear to see: per capita income in the Eurozone is stuck at only 70 percent of the corresponding American value, and the US economy is recording growth levels far superior to European ones. Talk of Europe’s decline is once again rife. An in-depth analysis of these phenomena is contained in the Sapir Report [2003], which set out to define the political agenda that must be followed in order to re-launch European economic growth.
A trickier assessment emerges from two recent papers [Faini 2004, Blanchard 2004] that, without wishing to contradict the basic theme of the Report (i.e., the need for a significantly greater amount of resources to promote research and innovation at continental level), nevertheless paint a more detailed picture of the current state of the European economy. In particular, Faini reveals that as long ago as 1981-90 the growth rate of the American economy (2.9 percent) was already half a point greater than that of the European economy (2.4 percent) and that in the period 1991-2002 the gap widened to almost a point, with the US economy recording 2.88 percent and the Eurozone 1.92 percent. But the picture changes altogether if one considers per capita growth of the Gdp: indeed, whereas in the first of these decades growth in the Eurozone was slightly higher than in America (2.1 percent in Europe versus 1.9 percent in the USA), in the period 1991-2002 the reverse was true (1.73 percent in the USA versus 1.6 percent in Europe). Much of the difference in growth rate measured in this way, i.e., on the basis of the Gdp, is thus attributable to the increase in the population.[1] Breaking down the last decade, it can be seen that the European growth rate fell dramatically in the sub-period 1991-1996, whereas in the second half of the decade it was basically in line with that recorded in America.
In his analysis, Faini also seeks to measure the factors that have influenced the growth rates differential, showing clearly how increased hourly productivity contributed to reducing the income gap between Europe and the United States, the Eurozone recording a level of 2.09 percent as against the USA’s 1.30 percent in the period 1979-2001, a result dramatically reversed in the latter part of that period, from 1997 to 2001, which saw American productivity shooting up (2.92 percent) and European productivity falling sharply (1.09 percent).[2] But, leaving aside this long-term trend of increased productivity, the factor that really seems to account for the constancy of the disparity in per capita income is the number of hours worked, which has remained basically stable in the United States, but fallen dramatically in Europe, from 1745 hours in 1979 to 1521 in 2001.
The results of Faini’ s analysis are largely in line with those produced by Blanchard, which reveal that Europe has recorded a substantially greater increase in productivity in the past thirty years, but that whereas Europe used part of this increased productivity to increase leisure, in the United States it was channelled into increasing production. The two authors agree that these observations should not, however, be used as an excuse for not introducing the reforms — in particular, through the liberalisation of labour and, especially, of products markets, and the strengthening of policies designed to promote research and technological innovation[3] — that are needed in order to boost the European economy, particularly bearing in mind the fact that in recent years the gap between the American and European growth rates has again been increasing.
The Sapir Report starts from other assumptions and, not subscribing to this interpretation of Europe’s relative decline, prescribes a different therapy to boost the European economy, a strict regimen based first and foremost on a considerable concentration of Community spending on research and technological innovation.[4] But one factor common to these different viewpoints is probably their criticism of the policies conducted in Europe over the past decade, a criticism that targets in particular the constraints imposed by the Stability Pact at a time when most of the Eurozone countries found themselves in conditions of economic stagnation. Meanwhile, from a political point of view, the crisis of the Pact emerged quite clearly when, following a decision by the Council, France and Germany escaped sanctions notwithstanding their renewed violation of the limits imposed by the Maastricht Treaty on the size of the deficit.
7. European Economic Policy.
We have already discussed the shortcomings of the Stability Pact. It is now worth considering the scope for promoting economic recovery in the Eurozone through economic policy initiatives conducted at European level. A policy for re-launching the economy at national level cannot be seen as an adequate way forward, not only because the effectiveness of such a policy would be limited — the openness of the economies of the member states within the single market reduces expansionary and thus multiplier effects considerably — but also, and above all, because in the presence of strong spillover effects, the production of that public asset called “stabilisation” necessarily remains at sub-optimal levels. In order to sustain the European economy, it is thus necessary to think in terms of a common initiative, as also suggested by the Sapir Report, which envisages a different use of Community budget resources. To this end, the steps that need to be taken at European level are well known and have been clearly defined within the ambit of the Lisbon strategy, which aims to turn Europe into the world’s most dynamic and competitive economy, knowledge-based; but the failure to implement the Lisbon strategy must prompt us to conclude that it is in the political and particularly in the institutional sphere that the problems and difficulties arise. Even the draft Constitution fails to introduce any substantial change in relation to the management of economic policy. Indeed, Article III-178 decrees that “member states shall conduct their economic policies in order to contribute to the achievement of the Union’s objectives, as defined in Article 13, and in the context of the broad guidelines referred to in Article III-179(2)” and Article III-179(1) states that “member states shall regard their economic policies as a matter of common concern and shall coordinate them within the Council”.
This solution presents an important innovative element, but also a severe drawback. The coordination of fiscal policies model adopted in Maastricht, and confirmed by the Constitution, is significant because it tends not to assign stabilisation policy entirely to Europe, but instead leaves primary responsibility for it with the nations, going only so far as to affirm the need to guarantee coordination of fiscal policies at European level (an attempt, at least, to avoid the risk of asynchronous stabilisation policies, with one country pursuing an expansionary policy while another is implementing a recessive economic policy) and, through multilateral surveillance mechanisms, to direct national fiscal policies towards convergence of economic performances.
This is, indeed, a major shift away from the theoretical model of fiscal federalism (Dates [1972]), according to which responsibility for stabilisation lies with central government. Instead, in the European experience, contrary to what is normally suggested in the literature, it has not been deemed necessary to transfer the direct management of stabilisation policy to supranational level. Responsibility for stabilisation policy is, indeed, left in the hands of the states, even though coordination of it at supranational level has to be guaranteed. But while this innovation, in principle, must be considered positive in that it strengthens the federalist vein in economic policy management, it must nevertheless be reiterated that this model is severely flawed, the flaw being that the coordination is basically ineffective in that it has to be carried out within the ambit of the Council, which can only issue recommendations — recommendations that are not sustained by adequate coercive mechanisms obliging the states that receive them to adopt the measures they prescribe.
Also significant is the procedure for the adoption of the recommendations. Indeed, the draft Constitution produced by the European Convention stated (Article III-76) that “the Council shall, on a proposal from the Commission, having considered any observations which the Member State concerned may wish to make and after an overall assessment, decide whether an excessive deficit exists. In that case it shall adopt, without undue delay, according to the same procedures, recommendations addressed to the Member State concerned with a view to bringing that situation to an end within a given period”. But the Article 184(6) in the text of the Constitution adopted by the Intergovernmental Conference replaces the clause “according to the same procedures” with “on a recommendation of the Commission”: consequently, whereas the initial version required a proposal from the Commission, which the Council could reject only unanimously, the revised version makes provision for a recommendation on the part of the Commission, which, to be rejected, need only be opposed by a minority. The difference is thus substantial and represents a further erosion of the powers of the Commission in favour of the Council. Furthermore, the recommendations addressed to the member states will no longer be made public, thereby also precluding a possible “moral suasion” effect.
As a matter of fact, fiscal policy decisions taken at European level are subject to the principle of unanimity, but this rule can guarantee neither the democratic nature nor the effectiveness of such decisions. Ultimately, in the presence of a confederal structure like the one that persists in the fiscal area, in which the right of veto still prevails, and of a coordination whose effectiveness is not guaranteed by the attribution of effective powers to the highest level of government, what we have is not a European economic policy, but a summation of national policies, which are not equipped to promote, in Europe, the growth policy that Europe needs. The monetary union thus lacks the support of an economic union able to guarantee growth of income and of employment, and to promote the achievement of the other economic and social policy objectives mentioned in Article I-3(3) of the Constitution, which decrees that: “the Union shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, highly competitive and aiming at full employment and social progress, and with a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.”
Once the opportuneness of implementing a European policy for growth is acknowledged, there emerge two different problems that must be tackled, and viewed entirely distinctly. The first concerns the possibility of achieving, through an effective combination of fiscal and monetary policies (given that monetary policy is now managed directly by Europe), a macroeconomic equilibrium in the entire Community. The second problem, which here we mention merely in passing, concerns the possibility of guaranteeing stabilisation of the macroeconomic variables in each of the member states following the abandonment, in the wake of the creation of the single currency, of the possibility of modifying the exchange rate level. Here, the rules of the Stability Pact, in particular, are at stake.
Instead, with regard to the development of the European economy as a whole, the fiscal policy direction adopted emerges as particularly significant, especially considering that the statutes of the European Central Bank state clearly that the priority task of monetary policy is to guarantee price stability. With regard to fiscal policy, the main problem that emerges is that of establishing whether the income growth targets must be reached attained through the Community budget — as also suggested by the Sapir Report — or instead through coordination of the fiscal policies conducted by the member states.
8. The Limits of Coordination and the Reform of the Budget.
In all existing federations, the macroeconomic stabilisation of the entire economic system is a task that falls to central government. From a theoretical point of view, the main justification for assigning this function to the federation must lie in the existence of external effects. In an open economy a considerable proportion of public expenditure is destined, through variation of imports, to benefit non-residents, whereas the residents themselves are required to sustain the resulting costs through the higher taxation that will subsequently be required to fund the increased public debt: the result is production of a less than optimal amount of the public asset known as stabilisation.
Economists largely share the view — already theorised by Musgrave[1959] in his definition of the economic functions of the public sector — that the stabilisation policy must be the responsibility of central government. This was indeed the line taken by the MacDougall Report [1977], which remarked that “the prima facie case for an increasing Community involvement in the general regulation of economic activity is based on the increasing interdependence of national economies, through increasing trade, capital flows and internationally transmitted inflation. The more open the economies of member States in all these respects, the less effective national instruments of economic policy become. Multiplier effects on internal demand of tax or expenditure changes are dampened by a high propensity to import. The presumed remedy is to pursue the objectives at a higher level of government with a broader jurisdiction encompassing major spillover or leakage effects, either through coordination or direct fiscal action. However, any proposal for direct fiscal action for this purpose at the Community level encounters two major issues, the interrelation with monetary policy and the question how to achieve adequate scale of operation.”
The first obstacle to the Community’s taking over of stabilisation policy management, mentioned in the MacDougall Report, appears to have been overcome within the framework of Emu, since monetary policy has become Europe’s responsibility. But the second obstacle to the use of fiscal action for the purpose of economic stabilisation, remains unresolved. The element that distinguishes the Community situation from that of existing federal states is, in fact, the enormous disparity, considering public expenditure as a whole, between the amount that is managed through the budgets of the member states and the amount that is managed through the Community budget, the latter corresponding, in 2003, to just 0.98 percent of Europe’s Gdp. The MacDougall Report had indeed already remarked that “as to the question of critical scale of fiscal action, the small size of the Community budget in the ‘status quo’ and ‘pre-federal stage’ implies that in order to have a perceptible macroeconomic effect on the Community economy as a whole, the budget balance would have to swing by enormous percentage fractions of this budget e.g. 50 percent.”
In general, it is thus believed that, given the current size of the budget and the rules that govern it (i.e., the impossibility of closing the budget in deficit (Article I-53) and the lack of flexibility due to the multiannual financial framework introduced by agreements on budgetary discipline in 1988 and confirmed in Article I-55), the role of the Commission in the management of the stabilisation policy at European level can amount to nothing more than promoting coordination of the member states’ fiscal policies.
Coordination is certainly necessary, even in the presence of direct fiscal action at central government level, in order to prevent the emergence, due to pro-cyclical budgetary policies at lower levels, of effects that impede the attainment of the stabilisation policy objectives. But within the Union, coordination is the only instrument available for countering the shocks that can hit the European economy. In this regard, it is necessary to be aware of the need, first of all, to evaluate from this perspective the compatibility of the rules established by the Stability Pact, which require the budget to be close to balance or in surplus. Indeed, at national level, given the impossibility of using the instrument of monetary policy, anti-cyclical variations of the budget balance, with the formation of surpluses during expansionary phases and deficits during recessive phases, would tend to increase if full responsibility for the stabilisation policy were assigned to the member states. Second, it should be recalled that as external effects become increasingly marked, with completion of the single market, the less willing the member states will be to develop stabilisation policies. Finally, and this appears to be the decisive point, the effects of a discretionary policy based on coordination of the fiscal measures adopted by the member states tend to emerge with a time lag that is so great as to void this policy of all its stabilising potential.
Coordination of the fiscal policies conducted by the member states is thus a necessary condition, but not one sufficient to guarantee the effectiveness of a common stabilisation policy against severe macroeconomic shocks affecting the European economy. In this regard it is worth recalling that fiscal policy can generate asymmetric effects in a monetary union, and thus a deflationary bias. If, indeed, there emerges the need to adopt a restrictive fiscal policy — for example to contain the budget deficit following an exogenous shock which has produced negative effects on volume of output —, there is the risk that each member state will increase taxation or reduce expenditure without taking into account the deflationary effects induced by similar measures adopted in the other countries. Basically, the risk of overshooting derives from the need to attain the objective come what may, regardless of the behaviour of the other partners, not least in order to respect the constraints imposed by the Maastricht Treaty and to avoid the sanctions set out by the Stability Pact. But, on the other hand, the pursuit of expansionary policies is difficult, both because the effects of the fiscal policy are, in any case, partially lost as a result of the existence of spillovers, and because countries are unwilling to act as an economic driving force, generating advantages the benefit of which will also be reaped by their free-riding partners.
Coordination can certainly reduce the probability of this deflationary bias emerging, but given the time it takes to arrive at the political decision needed in order to put it into effect, the risk of overshooting, due both to the effects of automatic stabilisation and to discretional fiscal policy measures, nevertheless remains. It must also be underlined that, in the process of reaching effective political decisions, the stronger states certainly seem to wield greater influence in the definition of coordinated fiscal policy measures, as is the case in all confederal type political structures. The member states that are economically, and politically, weaker are thus unlikely to follow this path with much enthusiasm.
In short, the conclusion that can be drawn from these observations is that the Union, in a political framework that is in any case destined, according to the intentions of the founding fathers, to evolve in a federal direction, must be equipped to manage an autonomous policy for promoting growth through adequate budgetary policy reforms that include: a) increase of the size of the budget (this is inevitable, not least for reasons related to the allocation of resources, particularly in view of a much needed increase of the Union’s competences in the spheres of foreign and security policy; b) modification of the budgetary rules in order to guarantee compatibility with the objective of monetary stability in the medium term, but also to allow more flexible use of resources in the short term; c) the introduction of budget financing instruments that can be considered true own resources and that, guaranteeing real autonomy, strengthen the competences of the European budgetary authorities, at the same time introducing flexibility on the revenue side so as to favour automatic stabilisation in response to exogenous shocks affecting the European economy as a whole.
9. The Institutional Requirements for an Effective European Economic Policy.
In the current Community setting, characterised by the existence of a confederal type political structure, control of European public expenditure is guaranteed by strict budgetary discipline rules and by the fact that decisions on revenue can be taken only by the unanimous approval of the member states. This solution is generally regarded as highly inefficient, and the need to introduce major changes thus appears entirely reasonable. But given the current political conditions and bearing in mind the debate that has grown up around the Constitution, the kinds of budgetary reform previously hypothesised appear extremely unrealistic. They are, indeed, based on a strengthening of the competences of the budgetary authority, made up of the European Parliament and a Council transformed into a federal senate and given the capacity to reach qualified majority decisions also in the fiscal sector. Furthermore, the budgetary authority should also have the power to make decisions on the financing of European public expenditure. And in fact, in the ambit of a political union with a federal vocation — which is what might be hoped emerge from the new Constitution — it should be envisaged that the entire budgetary policy, both the revenue and expenditure sides, be governed democratically through decisions reached jointly by the two branches of the budgetary authority, still in full compliance with the terms of the Maastricht Treaty that impose fiscal policy limits designed to guarantee the financial stability of the Union. And management of the entire budgetary policy should be entrusted to the Commission, transformed into an out-and-out European government, sustained by the consensus of the citizens and answerable before the two chambers: the Parliament, representing the citizens, and the Council, representing the states.[5]
Only when these two conditions exist will it finally be possible to talk in terms of an effective economic policy; but as long as coordination continues to represent the only available instrument and as long as the Commission lacks the powers to enforce it, all we are left with is a summation of national economic policies, and not a European policy. From this perspective, not only the Lisbon strategy, but also the reforms envisaged by the Sapir Report are inevitably destined to remain a mere illusion. In the meantime, the progressive decline of the European economy, which, in the current phase of global economic recovery, is proving unable to keep up not only with the United States, but also with China, Japan, Russia and India, is fostering a growing disillusionment with the European Union, as demonstrated by the poor turn-out at the recent European elections. The situation thus seems to come full circle, given that euro-pessimism leads to a gradual strengthening of those sectors of the political class that most openly oppose a federal outcome of the process of European unification; but this federal outcome is the crucial prerequisite for Europe’s regaining the decision-making capacity it must have if it is to play, in conditions of equal partnership with the United States, a role on the international stage and to close, once and for all, the gap that separates it from the American economy.
BIBLIOGRAPHY
Aghion, P., Pisani-Ferry, J. [2003], “Réponse à nos procureurs”, Revue de l’OFCE.
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[1] On this factual basis it is correctly observed that “‘there is little prospect of Euroland achieving an average growth rate of 3% a year over the next decade — as suggested, for example, in the March 2000 Lisbon Agenda — unless there is a marked change in demographic trends. This would require a big shift in political thinking in Europe to encourage much greater immigration — such as a relaxation of restrictions on migration from EU accession countries that exist for the next seven years in many EU member states.” (Daly [2004], p.13).
[2] Faini’s analysis coincides substantially with the conclusions reached by Gordon [2003], who reveals that in the five-year period 1990-95 American production increased by 2.38% and hourly productivity by 1.14%, as against a 1.6% increase in production in Europe, where there was a quite high increase in hourly productivity (2.46%). But the situation was reversed in the period 1995-2000, which saw production increasing by 3.22% in the USA and by 2.24% in Europe, while the increase in hourly productivity was far greater in the United States (2.13%) compared with Europe (1.27%). Similar conclusions to those of Faini are drawn by Daly [2004], who observes that “over the past ten years, Euroland’s “problem” has been one of low labour utilisation rather than productivity. When defined as output per hour, the level of Euroland productivity was only 4% less than the US’s in 2003, slightly better than the position ten years ago. Labour utilisation, on the other hand, was 28% lower in Euroland in 2003 than in the US.” (p.7).
[3] “It is not a question of finding particularly original answers, but rather of managing to select, within the action of the government, adequate incentives capable of stimulating positive action in two fundamental directions: the accumulation of capital, in its various forms, and the increase of productivity, in particular through a spread of innovation and technical progress.” (Visco, I [2004], p. 310).
[4] In actual fact, the Sapir Report analyses both the structural and cyclical factors that explain the delay of the European economy. Indeed, in a recent note (Aghion and Pisani-Ferry [2003]), the two authors of the Report reveal that “macroeconomic policy and structural changes must not be opposed to each other. The common conclusion that we have reached recognises the priority of structural factors, but also the impact of errors of macroeconomic management.”
[5] Along these lines, Colligon [2003] ends a broad analysis — perhaps the best recent contribution on Europe’s economic Constitution — revealing that “‘the necessary power for macroeconomic policy-making in the European Union can only come from a fully and democratically legitimated government which reflects the collective preferences in the European constituency. This implies, of course, that the economic government cannot be an independent intergovernmental structure, but its tasks have to be assigned to the new style European Commission which would be responsible to European citizens.” (p.161)
