Global Policy Forum

By Andrew Watt

It is often the case with policy and analytical documents produced by international bodies that the most important things are to be found in the annexes. In the specific case of the conclusions of the European Council of 23/24 March 2011, there are two long annexes. And you can pretty much dispense with the rest.

The first sets out the Euro plus pact, the ‘final version’ of the euro pact and the distant descendent of the infamous Franco-German competitiveness pact. (The ‘plus’ comes from the fact that the new pact has also been signed by five Central and East European countries plus Denmark). The second describes the technicalities of the European Stability Mechanism (ESM). This will be, from 2013, the successor to the European Financial Stability Facility. In more common parlance it is the bail-out fund for hard-up EMU member states.

The symmetry of these two annexes also sums up the nature of the deal – which some are touting as a Grand Bargain – that has been done. The essence of the deal is the promise to provide effective and timely financial support to EMU countries in future need – and thus the demise of the no-bail-out principle that was a cornerstone of the Maastricht economic governance architecture – in exchange for greater European integration of economic policymaking. At this high level of abstraction it is a good deal and will come to be seen as a milestone in the history of European integration. Whatever its shortcomings – and there are many – it is important not to lose sight of this fundamental point.

At the same time, it is vital to recognize that the Pact does not chart a path out of the crisis. In particular there is no strategy for achieving faster growth through higher (public and private) investment. On the contrary, the combination of fiscal austerity and supply side reforms will delay the pick-up of growth and keep unemployment unacceptably high for the foreseeable future. Nor does the Pact hold out the promise of near-term resolution of the on-going banking crisis, an essential precondition for recovery.

To that extent the Pact is a missed opportunity. Still it can also be evaluated on the more limited terms of a small deal, rather than a grand bargain.

Let us start with the genuinely positive elements. The ESM is what Europe and particularly the EMU members need in the medium run. It is a belated victory for all those concerned in part years about the viability of a monetary union lacking a large central budget, extremely limited transfer mechanisms and a no bail-out clause. The existence of such a fund, with an intervention capacity of close to half a trillion euro, makes its eventual usage less likely, as it will deter speculation. It is essentially an IMF for the euro area. It will lend money to countries in need and can also buy their bonds directly. Provision of support will be subject to conditionality agreed by all the other member states. This is fine in principle: what comes out in practice will depend not least on the political balance of power at the time that help is requested. The perverse measures imposed on Greece and Ireland are not encouraging precedents. But there is such a thing as a learning curve. The price of the loans – the surcharge on the interest rates that the ESM itself pays on its borrowing – has already been set out: at 2 percentage points for short-term and 3 p.p. for loans above three years that is too high. (Why punish a country further that is committing to an agreed and doubtless painful consolidation package and make the consolidation that much more difficult?) The ESM is key, but here too, there are concerns about the shorter term: full funding for the existing EFSF is not yet assured and a decision has been postponed.

There is also some bits of good news – at least in the sense of representing improvements on the previous proposals – regarding the policy coordination provisions in the Pact. For example, the discussion of unit labour costs, while far from perfect, is more balanced, the language more nuanced, and there is explicit recognition of the need for common initiatives to raise productivity in lagging regions/countries. The proposals for dealing with demographic challenges are more sensible (calling for higher participation rates). Employment concerns feature prominently, with unemployment and participation rates to be used as performance indicators. (What is not clear is what conclusions will be drawn if these indicators flash red.) Not least, there is a useful call for ‘pragmatic coordination of tax policies’ to avoid harmful tax competition and fight fraud, something I have repeatedly called for to be included in such a deal. Importantly the governance processes are also better, with the European Council (i.e. Heads of state and government), rather than finance ministers and DG Ecfin at the Commission, playing the leading role, and explicit recognition of the involvement of other actors (including social partners).

Many of the concerns raised in previous posts on economic governance reforms remain, however. The discussion of ‘competitiveness’ remains dogged by conceptual misunderstandings and asymmetries. The language on wage bargaining is very suggestive (but also vague). The need for a more staged and gradual approach to fiscal consolidation that allows for the negative impact on demand and output is still not recognized. And it remains unclear to me how the associated reporting and monitoring process squares with the parallel exercise under the Annual Growth Survey.

This is a political deal, an important one with some positive elements, but not a grand bargain. It is not a blueprint for growth, consolidation and convergence. But the ESM is an important prize. And, yes, we do need more policy integration in Europe. Had the balance of power been different, a different Pact would have emerged, but given the dominance of the Right on the Council, but also within the Commission and European Parliament, it could have been a lot worse. In most areas the language is sufficiently vague, meaning that struggles will no longer be at this programmatic level, but rather at the more concrete policy level. The process is non-binding. It remains to be seen how this will interact with the Annual Growth Survey’s more clearly liberal approach (at least for this first year) where the possibility of countries being sanctioned for non-compliance does raise concerns. It is vital that progressive governments, but also opposition parties, trade unions and other civil society actors develop and present solutions that promote productivity, participation and equality and sustainability; in short a new growth model.  The reporting and monitoring processes of both the euro plus pact and the European semester/AGS should be seen as opportunities to push such policies and convince voters that progressive policies are the ones that promise a better future.

And in the short term the fight against blind austerity must continue and proposals put forward that chart out a path towards speedy recovery and lower unemployment. Whatever its positive aspects and significance in the longer run, this the euro plus pact does not and cannot offer.