On Wednesday, May 7th, the European Commission will put forward a long-awaited report on the Eurozone. A few months ahead of the Euro’s 10th anniversary, this report is unlikely to trigger a debate the EMU should go through, given recent developments, such as the increasingly observed cyclical divergence and prolonged business cycles that EMU is experiencing, and the economic tensions that are coming up e.g. for Spain. There is a (very) slight chance that the report is somewhat more ambitious regarding external issues, such as the international representation of the Euro, but it is again improbable that it will tackle the issue of what to do with the external value of the euro (i.e. how to manage relationships with the EMU’s major economic partners, the US, China, the UK, …). But let’s concentrate on the question what there is to expect for the internal aspects of EMU governance for the moment.
There are several reasons for the assumption that the European Commission will not use this report to launch a controversy over future reforms of the EMU. First, within the Commission, while the consequences of cyclical divergences and of the external value and representation of the Euro, are getting increasing attention, it does not look as if the institution has a clear position on an adequate political response to these problems and is interested to launch a (potentially hot) debate on this matter.
Second, since the start of EMU, quite contrary to what Europe could witness under a Commission President Jacques Delors, the Commission has not attempted to take any political leadership on the future development of the EMU. It restricted its activities mostly to being the “guardian of the Treaty”, by insisting on a strict application of all rules (e.g. the Stability and Growth Pact, over which it took the member governments to Court for their “interpretation” of the rules when Germany, France, Portugal were in violation of the 3%/GDP deficit targets). But at least recently, it did not develop any further reaching proposals. In addition, the Commission did not make any visible effort to support the Eurogroup President Jean-Claude Juncker in establishing a stronger political leadership within the EMU, since he entered into office in January 2005.
Third, given the diametrically opposed positions by France and Germany, the two largest EMU countries and economies, over the future of the EMU, the Commission will do its best to maintain a “neutral stance” on the question whether EMU reform is needed. In this case, its position will strengthen the “conservative side” in the game, led by Germany, which argues that any reform of institutions, the exchange rate regime, fiscal rules, the ECB’s statutes or the like are absolutely useless. Another consideration is probably, that any attempt by the Commission to push a strengthening of EMU governance mechanisms would immediately cause tensions with the non-EMU members, especially the voluntary Opt-Outs, the UK, Denmark and Sweden.
So, for next Wednesday, the Commission is likely to put forward a report which lacks surprises and new suggestions which would inspire a much needed thorough reform debate in the EMU. The paper is likely to be uniquely focused on questions related to the EMU in the narrowest sense of the term and will probably not aboard the issue in a wider EU perspective. It will hence most probably neglect the chance to link the question of the future governance challenges of the EMU to the ongoing “Future of the EU budget debate” ahead of the upcoming mid-term review of the EU budget. This latter discussion, which is currently being fed by public consultation processes (until June 15th) and some academic input.
This budget debate, as a recent expert workshop in Brussels showed, is strikingly “un-macro-economic” in the sense that debates both on the income and expenditure side totally neglect the “stabilizing function” of budget, and solely concentrate on allocation and redistribution issues (find the workshop contributions here, from an EMU perspective the only interesting paper was the one by Philippe Aghion as it brought a macro-economic dimension to the debate).
This strict seperation of the EU budget and the EMU debates is all the more a pity (read more on this position in this working papers co-authored with Sebastian Dullien) as an increasing number of scholars of EMU economics (and also to officials in the European Commission) find an increasing interest in the question how to deal with the perceived lack of convergence, and how (automatic) fiscal stabilization works or should work in the EMU, given the fact that national fiscal policies do not fulfill this role to a satisfactory degree as research makes increasingly clear.
An illustration of the fact that debates about the functioning of the EMU are more and more dominated by the view that economic convergence in EMU is not progressing as it may have been expected to do, and by the concern that monetary policy may have inappropriate effects in some regions was given at during a debate held in Berlin at the Hertie School with Jürgen von Hagen, Jean Pisani-Ferry and Paul de Grauwe (check this brief summary, for more in-depth analysis of the divergence issue see the academic conference Eurozone Watch co-organised with RGE monitor in 2007).
In the second half of this week we will see whether we were right to expect a document which will most likely not be a path-breaker for the debate on the future of EMU. It will also be interesting to review the reactions by the EMU governments (if there are any). As France has already leaked its disatisfaction with the upcoming report (see Le Monde of 27 April), it will be specifically interesting to observe whether the French government on this occasion gives any indications regarding its own intention to push the EMU debate (and possibly, as ventilated on several occasions, the idea to unite a Eurozone Summit during its EU-Presidency starting on July 1, 2008).
This text was co-posted on Eurozonewatch.