Opinion of the European Economic and Social Committee on Strengthening economic governance — The reform of the Stability and Growth Pact
Date: 2006-02-15
Institutions: European Economic and Social Committee
Subjects: budget policy, coordination of EMU policies, economic growth, economic policy, economic stabilisation, euro area, public finance, stability pact

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Opinion of the European Economic and Social Committee on Strengthening economic governance
— The reform of the Stability and Growth Pact

(2006/C 88/15)

On 10 February 2005 the European Economic and Social Committee decided to draw up an opinion,
under Rule 29(2) of its Rules of Procedure, on Strengthening economic governance — The reform of the Stability
and Growth Pact.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 27 January 2006. The rappor-
teur was Ms Florio and the co-rapporteur was Mr Burani.

At its 424th plenary session, held on 14 and 15 February 2006 (meeting of 15 February), the European
Economic and Social Committee adopted the following opinion by 88 votes to seven with five abstentions.

1. Summary

The EESC is greatly concerned at the current lack of
1.1
It therefore
momentum in European economic governance.
believes that it would be appropriate to reflect once again on
all the economic policy instruments that the European Union
has adopted in recent years and to open another evaluation of
the Stability and Growth Pact reform process.

1.2

This document aims to:

— outline the various viewpoints which have driven the poli-
tical and economic debate over the six years in which the
Stability and Growth Pact has been in existence

— provide an assessment of

the process of reforming the
Stability and Growth Pact which has got underway in
recent months

— outline guidelines on strengthening European economic

governance.

1.3
Since its inception, the Stability and Growth Pact has
played a key role in ensuring continued European economic
growth within a common framework of monetary stability.

1.4
Regrettably, along the way, there has been a lack of
coordination of European economic governance and this at a
time when international tensions have been — and are still —
running high, both on the economic front and politically.

1.5
There has been repeated pressure on the Pact during its
six years of existence from a number of Member States calling
for its reform.

1.6
The reform process must be considered unfinished since
it has not provided a guarantee that the process of coordinating
European economic policy will genuinely be stepped up — a
process which would enable us to make the most of the oppor-
tunities provided by Economic and Monetary Union for
economic growth and job creation.

1.7
The changes proposed by members of the European
Economic and Social Committee are focused on that very

need to strengthen European economic governance. Their aim
is the coordination of economic and fiscal policies, with due
respect for Member States' budgetary consolidation and with a
view to boosting investment pursuant to the Lisbon Strategy
objectives.

2. From the Maastricht Treaty to the Stability and Growth

Pact

2.1
The Stability and Growth Pact, adopted in 1997, was
intended to secure ongoing budgetary discipline within Economic
and Monetary Union as launched by the Maastricht Treaty (1).
According to this principle, the concept of safeguarding sound
government finances has represented — in the eyes of those who
drafted it — the means to strengthening the conditions for
price stability and for strong and sustainable growth conducive
to employment creation.

Under this approach,

2.2
‘Adherence to the objective of sound
budgetary positions close to balance or in surplus will allow all
Member States to deal with normal cyclical fluctuations while keeping
the government deficit within the reference value of 3 % of GDP’ (2).

The Stability and Growth Pact

2.3
following basic elements:

is made up of

the

— a political

involved in the Pact
commitment by the parties
to the
(Commission, Member States, European Council)
timely strengthening of the surveillance of budget positions
and coordination of Member States' economic policies;

— preventive surveillance action aimed at preventing budget defi-
cits going above the reference value of 3 % of GDP. To this
end, Council Regulation 1466/97 reinforces the process of
multilateral surveillance of budget positions and the coordi-
nation of economic policies. It provides for the submission
by all Member States of stability and convergence programmes,
which are examined by the European Council;

(1) The Stability and Growth Pact was formally adopted in 1997 (with
the aim of strengthening budgetary discipline within Economic and
Monetary Union as provided for by Articles 99 and 104 of the
Treaty establishing the European Community) and came into real
effect with the launch of the euro on 1 January 1999.

(2) Resolution of the European Council on the Stability and Growth

Pact, Amsterdam, 17 June 1997.

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— dissuasive action: an early warning is triggered for those coun-
tries which may be in danger of excessive deficit, inducing
the country in question to adopt
suitable correction
measures;

— for countries with actual excessive deficits an ‘excessive deficit
procedure’ (3) is triggered, at the end of which, if the country
the excessive
take effective action to correct
does not
deficit, a sanction of up to 0.5 % of GDP may be applied.

3. Review of the first six years of the Pact

the

acknowledged that

Before reviewing the first six years of the euro, it should
3.1
implementation of European
be
Economic and Monetary Union has been one of the most
important, most surprising events in European history. The
mere fact that some 300 million people in 12 European coun-
tries are now sharing the same currency — and have been
since January 2002 — is an indication of how important this
historic event is for Europe.

3.2
The successes and failures of the first six years of this
experience can essentially be described in terms of the two
words which typify the Pact:
it has been an unequivocal
success as regards monetary stability but just as clear a disap-
pointment when it comes to the EU's economic growth, which
has been inadequate. Over the past six years, inflation has been
significantly contained in the euro area, at around 2 %. Persis-
tent European Central Bank action controlling interest rates has
successfully preserved monetary stability.

3.3
A second positive factor linked to the introduction of
Economic and Monetary Union is the integration of European
markets (particularly the financial markets), with the elimina-
tion of transaction costs and exchange risks. Combined with
monetary stability, this integration has steadily brought down
interest rates in the euro area.

The combined effect of price stability and lower interest
3.4
rates meant that, after some initial uncertainty (1999-2001),
confidence gradually increased in the European currency, as
can be seen from figure 3, which shows how the euro rose in
value.

fact,

In actual

run-up to EMU that the single currency would further boost
economic growth.
the expected increase in
economic growth in the euro area did not materialise. Contrary
to forecasts, it was those countries which had not joined the
euro that benefited from an increase in economic growth,
recording GDP growth rates which actually outstripped those
recorded in the euro area.

3.6
Another unexpected effect of the introduction of EMU
was asymmetric shocks within the euro area. Indeed, growth
performance varied widely between the EMU States, with much
greater disparities than might have been expected: some coun-
tries were in recession while others were enjoying periods of
economic growth.

3.7
The expectations nurtured in the euro-area Member
States included the hope that a single currency would lead to
greater price transparency and that greater competition in the
consumer goods market would result in lower prices and clear
benefits for consumers (thanks to an increase in their real
income); unfortunately, this did not always prove to be the
case. Failure — on the part of some Member States — to carry
out controls, particularly in the changeover phase, led to unjus-
tified price increases. This was the case as regards the prices of
some foodstuffs in Italy, in particular, but also in Germany and
Greece. Because of the distortions (in transfer pricing mechan-
isms) in these countries, the euro was not seen by the public as
being able to increase the prosperity of consumers in general.

3.8
There is no doubt that these initial six years of EMU
have been a success mainly in monetary and financial terms.
The euro has become more widely-used by financial markets
and banks. In just six years, it has become the second most
widely-held currency in the world (4). This was facilitated by a
rigorous monetary policy whose principal goal was to encou-
rage price stability, in line with the primary objective of the
European Central Bank, and thereby to increase confidence in
the new currency on the financial markets (5).

4. EMU: stability versus growth

3.5
Despite these clearly positive factors linked to the intro-
duction of the euro, there are others — in the area of economic
growth — which are cause for serious concern. It should be
noted that the second half of the 1990s saw substantial GDP
growth rates in the countries which had joined the European
single currency. This raised considerable expectations in the

4.1
Sadly, the success achieved in monetary and financial
terms was not matched by similar success in the real economy,
in terms of
increasing production or employment. Hence,
despite the fact that it is a development of considerable impor-
tance, the euro is not yet perceived — by a large part of the
public in the euro area — to be the success story that it is.

(3) The excessive deficit procedure is not applied in the following
exceptional cases: i) where the deficit is the result of an unusual
event outside the control of the Member State concerned; ii) if the
country is in economic recession (if there is a fall in real GDP of at
least 2 %). It should be pointed out that the excessive deficit proce-
dure has been applied at least 26 times to date and that, on at least
10 of these occasions, it concerned euro-area countries. The coun-
tries in question were: Germany and Portugal (2002); France (2003);
Greece, Hungary, Czech Republic, Cyprus, Malta, Poland, Slovakia,
the Netherlands, France, Germany and the United Kingdom (2004);
Hungary, Greece, the Netherlands and Italy (2005).

(4) The internationalisation of a currency is essentially driven by
therefore, by the degree of confidence that

market
economic operators have in that currency's stability.

forces and,

(5) ‘The primary objective of the ESCB (European System of Central Banks)
shall be to maintain price stability’. And: ‘without prejudice to the objective
of price stability, the ESCB shall support the general economic policies in
the Community with a view to contributing to the achievement of the objec-
(Treaty Article
tives of
105(1)). The objectives of the Union (Article 2 of the Treaty on
European Union) are a high level of employment and sustainable
and non-inflationary growth.

the Community as laid down in Article 2’

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There are a number of

4.2
interpretations regarding the
causes of this ‘stalling’ of Economic and Monetary Union, with
two main schools of thought: those (whom we can call structur-
alists) who feel that the economic growth shortfall is due essen-
tially to structural rigidities which have nothing to do with the
rules laid down by EMU, and those (macroeconomists) who hold
the diametrically opposed view that first the Maastricht Treaty
and then the Stability and Growth Pact introduced rules which
generated an ineffective macroeconomic policy which ‘blocked’
the potential for European economic growth.

The

substantial

existence of

4.3
structural disparities
between the EMU Member States is indisputable, although this
interpretation alone does not suffice to explain the sluggish
growth of the euro-area economy from 2001 onwards. The
European countries which were not part of the euro area came
out of a situation of stagnation more definitively and quickly
than the euro-area countries. As of 2001, the difference in
economic growth rates between euro-area and non-euro-area
countries averaged at 1.1 %, with the latter in the lead. A
comparison of economic trends in the euro-area countries and
the United States reveals that although the downturn was less
intense in the euro area,
it lasted longer than in the United
States.

4.4
These disparities cannot be wholly explained by struc-
tural factors. There are additional contributing factors and, as
will become clear, the second interpretation — which deems
the current European macroeconomic policy inadequate in
both monetary and fiscal terms — supports this theory.

As far as monetary policy is concerned, the European
4.5
Central Bank,
in line with its sole objective of ‘guaranteeing
monetary stability’ in the euro area, adopted a particularly rigid
monetary policy, setting a target inflation rate of 2 %, which
was seen as excessively constraining during the period of stag-
nation in 2001-2002. It should, however, be pointed out that
the widely differing situations within the euro area did not
encourage the ECB to react quickly to the difficult economic
situation by cutting interest rates more drastically.

In the area of fiscal policy, too, the behaviour of the
4.6
euro-area countries was not such as to enable them to find a
timely way out of the difficult economic situation in 2001.
During the period of stagnation, these countries' debt ratio
remained almost unchanged (between 2001 and 2003 it rose
from 69.6 % to 70.8 %), while the United States reacted more
quickly during that period (its debt ratio rose from 57.9 % to
62.5 %), pursuing a Keynesian policy of using deficit spending
to bring the economy out of a period of stagnation.

4.7
The inability of the euro-area countries to adopt anti-
cyclical fiscal policies is in part a legacy of the past (due to the
public debts of national governments and the failure to get
them down during the upturn of 1996 to 2000) and in part
the result of
the constraints imposed by the Stability and
Growth Pact. Both in the case of countries which have a

the 60 % limit

government debt/GDP ratio under
(Spain
48.9 %, Ireland 29.9 %, Netherlands 55.7 %, Finland 45.1 %)
and of those which give no cause for serious concern, because
they are slightly above the limit set (Germany 66 %, France
65.6 %, Austria 65.2 %, and Portugal 61.9 %), the pact lays
down budgetary constraints which many see as unjustified (6).
One of the main criticisms of the Pact focused essentially on
the 3 % government deficit rule, which was viewed as comple-
tely arbitrary and ineffective in both downturns and upturns.
During downturns, it did not allow individual governments to
employ an expansionary fiscal policy to bring their economies
out of
time.
the downturn within a reasonable period of
During upturns, it did not guarantee that they would behave
appropriately and strengthen budgetary discipline. The Pact
was thus accused of being one of the main causes of EU institu-
tional inertia in the area of macroeconomics. Focusing solely
on intermediate goals (budget equilibrium and financial stabi-
lity), the Pact neglected or even hampered achievement of the
final objectives of economic growth and full employment, i.e.
macroeconomic stability (7).

4.8 Many proposals for reform involve concentrating not so
much on the deficit/GDP ratio, but rather on that of govern-
ment debt/GDP. Seen in these terms, the Pact should address
the debt
sustainability of euro-area countries and introduce
greater flexibility for those countries whose debt level is below
or around 60 %.

4.9
In September 2003, the economist Paul De Grauwe put
forward an interesting proposal for reform under which every
euro-area government should define its own objective regarding
debt/GDP (based on its own economic and financial circum-
stances) and take a series of economic policy measures over
time to achieve it. Although De Grauwe's proposal allowed any
country to deviate briefly from this objective (when justified by
cyclical factors), it did guarantee that the target debt/GDP ratio
would be met in the medium to long term.

4.10
Another proposed reform to the Pact was to introduce
a ‘golden rule of public finances’, under which investment expendi-
ture supporting the Lisbon Strategy goals (introduction and
dissemination of technological innovation, R&D and education
expenditure, etc.) would not be counted as expenditure
affecting the government deficit.

4.11
The ‘golden rule’ gives further ammunition to criticism
that the definition of public investment is too vague and could
end up covering all forms of expenditure. To confound such
criticism, there are those who propose — among them, the
French economist J.P. Fitoussi — that the European Council,
after consulting the European Parliament, should settle on what
public investments the ‘golden rule’ covers. This would use the

(6) Paul de Grauwe, 2003.
(7) J.P Fitoussi, 2004.

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vague definition of public investment as an opportunity to
develop a coordination policy by first establishing a system of
incentives to encourage individual countries to invest in par-
ticular areas of common interest (8). Commission President
Barroso's recent proposal to set up a Community fund for
investments of European interest, which are necessary for
growth and economic development, is therefore interesting and
should be further developed.

5.2
The institutional conflict within the European Union
mirrored that between the two pillars of the Union's fiscal and
economic policy: ensuring economic growth and at the same
time fiscal discipline on the part of the Member States. There
was thus a need for urgent reform of the Pact which would
strengthen it by making the two pillars more compatible. In
autumn 2004, the Commission drafted a reform proposal for
the European Council which set out five guidelines:

4.12
By this time, there was widespread discussion on the
measures needed to implement the Pact properly. The debate
centred on two opposing viewpoints: one which advocated
retaining a fixed regulatory framework, and one which asserted
that the Pact should be open to political decisions — taken by
governments — underpinned by economic principles. Thus
emerged the need to reform the Pact on the basis of a system
of rules capable of underlining its technical, economic and poli-
tical legitimacy (9).

5. Reform of the Pact: from the European Commission

proposal (10) to that of the European Council (11)

Criticism of the Pact was compounded when repeated
5.1
pressure on it in the difficult downturn of 2002-2003 showed
it was in need of reform. We all remember Germany and Fran-
ce's refusal to submit to the 3 % rule and the diatribe that
ensued between the Commission and the European Council. By
any measure, this was a real institutional sea-change, moving
from a Community method of open coordination set by the
rules of the Pact to a method of intergovernmental control that
was entirely self-referential. Many of the proposals for reform
required attention to be focused not so much on the deficit/
GDP ratio, but on that of debt/GDP.

(8) Fitoussi, 2004.
(9) It is worth quoting the conclusions of a recent article by Jean Pisani-
Ferry to stress the importance of the debate that began in 2004 on
reform of the Pact: ‘The significance of the debate that will take place in
the coming months should not be underestimated. The key issue that
clearly emerges is whether economic governance in the Eurozone should be
based on legally binding fixed rules or on collective decisions underpinned
by economic principles. The first model has been tried – until politics
reclaimed its rights. The second has not yet been tried – but the evidence is
that it cannot be made successful in the absence of technical, economic and
political legitimacy. If no agreement is reached, or if the second model fails,
the Eurozone is likely to adopt some kind of revamped version of Sinatra
doctrine – which is certainly not the best way to manage a currency union.
The Sinatra doctrine, named after the Frank Sinatra song “My Way”, was
the name that Mikhail Gorbachev used to describe the policy of allowing
neighbouring Warsaw Pact nations to determine their own internal affairs.
What followed is know.’ Pisani-Ferry, J. (2005).

(10) COM(2004) 581 final.
(11) COM(2005) 154 and 155 final.

The important thing in surveillance of budgetary posi-
5.2.1
tions is to concentrate on debt and sustaining equilibrium,
while continuing to monitor the deficit.

5.2.2 Medium-term budgetary objectives would be set for
each Member State, so as to allow for specific circumstances.
This would on the one hand prevent infringements of the 3 %
there is a downturn, and on the other
deficit/GDP rule if
reduce the debt/GDP ratio, not least to stave off the impact that
population ageing would otherwise have on the budgets of
some countries.

5.2.3
It is proposed that excessive deficit procedures (EDP)
take greater account of economic circumstances. The Pact's
definition of
‘exceptional circumstances’, which allows a
country to escape the excessive deficit procedure, could be
changed to cover longer periods of recession. The path for
deficit correction could be reviewed to take into account both
cyclical conditions and risks to sustainability. This would make
the adjustment procedure more responsive to the particular
circumstances of the country in question, guaranteeing more
time to correct the deficit than the year following that in which
the excessive deficit was identified.

Preventive actions to correct budget deficits should be
5.2.4
made more effective. Prompt preventive action would guar-
antee that budgets were re-balanced during upturns.

surveillance

Implementation of

5.2.5
should be
improved. The proposal gives the Commission ex ante powers
without any prior approval by the Council. Both the Commis-
sion's surveillance powers and that of the national monitoring
authorities would be strengthened.

rules

5.3
The Commission saw the proposal to reform the Pact
not as a revolution, but as an evolution that would allow the
Pact to deal with those critical situations which could lead, as
in the past, to institutional deadlock. By bringing the Pact into
line with reality, moreover, the Commission sought to improve
its credibility and encourage the Member States to take greater
ownership of its rules.

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The response issued by the European Council

in the
5.4
spring of 2005 was not quite what
the Commission was
expecting. At its spring meeting (22-23 March 2005), the Euro-
pean Council adopted ‘Improving the implementation of the
Stability and Growth Pact’, a document submitted by the
ECOFIN Council and putting forward significant changes to the
Pact. These are aimed at speeding up and clarifying the implemen-
tation of the excessive deficit procedure (Council Regulation (EC)
No. 1056/2005 of 27 June 2005) and the strengthening of the
surveillance of budgetary positions and the surveillance and coordina-
tion of economic policies (Council Regulation (EC) No 1055/2005
of 27 June 2005). These changes introduced greater flexibility
in providing specific forms of relief for countries which had
excessive deficits and in extending the time allowed for their
correction. It is worth focusing on the principal changes made
to the Pact by the European Council.

5.4.3.1
The reform of the Pact identifies, but does not quan-
tify, the following exceptional factors: a negative annual GDP
growth rate; a cumulative fall
in output together with GDP
growth rates below potential growth. These justifications are
accompanied by other important factors which the Commis-
sion should take into due account ‘in order to comprehensively
assess in qualitative terms the excess over the reference value’.

i) potential growth,

ii) prevailing economic downturn conditions,

iii) implementing the Lisbon Strategy,

iv) expenditure on research, development and innovation,

v) fiscal consolidation efforts in ‘good times’,

5.4.1
One major change concerns the definition of medium-
term objectives (MTOs). In the previous version of the Pact, these
were defined as positions close to balance or in surplus. Deficits
up to 0.5 % of GDP were accepted in special cases where
measurement of some budget headings was unreliable. There
was no provision for deviation from MTOs.

vi) debt sustainability,

vii) public investment,

viii) overall quality of public finances,

The measures introduced by the Council embrace
5.4.1.1
EMU and ERM II Member States with a government deficit
ranging anywhere from parity or surplus (for countries with
high debt and low growth potential) to a deficit of 1.0 % of
GDP (for countries with low debt and high growth potential).
Failure to meet the medium-term objective is accepted where
the government of the country concerned has carried out struc-
tural reforms.

5.4.2
Adjustment path to the medium-term budgetary objective.
In the previous version, this was not set by the Pact, but by
decisions of the European Council.

5.4.2.1
The new version allows a country to deviate from
the medium-term objective, and provides for this deviation to
be corrected by an annual adjustment of 0.5 %. The adjust-
ment path can be ‘modest’
in
upturns, so that the ‘windfalls’ of the latter can be used to
reduce deficit and debt levels. Deviations are permissible in the
case of structural reforms, and there are no sanctions for failure
to meet the annual adjustment of 0.5 %.

in downturns and ‘vigorous’

ix) size of financial contribution to support international soli-

darity,

x) size of financial contribution incurred in meeting Euro-

pean policy goals in the unification process (12),

xi) pension reform.

Deficit-correction deadline.

5.4.4
this
coincided with the year following identification of the deficit,
unless special circumstances emerged. These circumstances
were not specified, however, and the Council was therefore free
to set a new deadline.

In the previous Pact,

5.4.4.1
Generally speaking, the new Pact retains the deadline
of the year after the deficit is identified, but, in view of the
‘special circumstances’ included in the other factors referred to
above, it can end up being two years after the identification of
the deficit. There is a whole series of EDP deadlines stretching
over a period of time.

5.5
The reform undertaken by the European Council follows
a very different course from the Commission proposal, and can
hardly be seen as a compromise between that proposal and the
Council's demands. By distorting the distribution of compe-
tences between EU bodies, the reform introduces a number of
elements which weaken the Pact. Thus there is an imbalance in
competences between the Commission (as guardian of
the
Treaty), which emerges considerably weakened, the Council,
which comes out unduly powerful and the European Parlia-
ment, which is completely ignored in the process.

5.4.3
Factors justifying breach of the 3 % GDP reference value.
The previous Pact took account of the following temporary and
one-off factors: natural disasters, a 2.0 % fall in GDP and, at the
discretion of the Council, a fall in GDP of between 0.75 % and
2.0 %. No other factors were taken into account.

(12) This factor was inserted at the insistence of the German govern-
ment to take account of German re-unification costs. It is possible,
however, that the exception may also be claimed in future by
governments of countries that call for greater indulgence for their
budget deficit as they are net contributors to the EU budget
(Bouzaon and Durand, 2005).

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6. Initial evaluations of the Stability and Growth Pact

reform process

the Amsterdam summit

6.1
The reform chosen by the European Council substan-
tially weakens the principle of fiscal discipline introduced by
the Maastricht Treaty (1991) and subsequently affirmed by the
Pact at
in 1997. As Bouzon and
Durand (2005) have pointed out, the schizophrenia of the
reform process adopted by the Council was already discernible
in the ECOFIN Council document of 12 March, which said
that:
‘[I]t is essential to secure a proper balance between the
higher degree of economic judgment and policy discretion in
the surveillance and coordination of budgetary policies and the need
for keeping the rules-based framework simple, transparent
and enforceable.’ This amounts to real conflict between the
need to achieve political and economic discretion and the
maintenance of a regulatory framework that is simple, trans-
parent and reinforced:
the economic and political elements
appear to have prevailed in the current reform process at the
expense of the simple and transparent regulatory framework.

6.2
The reform substantially weakens the Pact in two ways:
firstly, by extending the deadlines, and secondly, by introducing
a system of exemptions and exceptions whose criteria are so
open to interpretation that they could cover everything. The
these two elements tends to make budget
combination of
surveillance weaker and less transparent. This makes the goal
of balanced public finances — as pointed out by the Deutsche
Bundesbank — ‘a moving target’ (13). With a Pact now less well
the Member
equipped to guarantee the fiscal discipline of
States, this could lead the European Central Bank to take on
the role of sole guardian of the Pact and the sole guarantor of
the European Union's monetary stability. This will then create,
in macroeconomic terms, a typical zero-sum game situation in
which the ‘gains’ from relaxing fiscal policy would be offset by
the ‘losses’ of a more rigid monetary policy (14).

6.3
Leaving aside what has emerged as a clear — and rather
successful — attempt by national governments to claw back an
economic policy instrument which the Pact had wholly or
partially taken from them, it is worth making a few general
observations.

6.4
It is absolutely clear that the way to increase the debt/
GDP ratio is to achieve a steady rise in the deficit/GDP ratio.
But it is equally true that when it comes to sustainability of
public finances, deficit is a mid-term goal and debt a final
goal (15).

(13) Deutsche Bundesbank's monthly report, April 2005.
(14) In a press release, the European Central Bank said it was ‘seriously
concerned about the proposed changes to the SGP […] it is essen-
tial that all parties concerned fulfil their respective responsibilities’,
ECB, 2005.

(15) As was quite rightly suggested in Paul de Grauwe's 2003 proposal,

quoted earlier.

6.4.1
One of EMU's key problems relates to the long-term
sustainability of Member States' public finances. The adoption
of Community instruments which can bring consolidation of
public finances for countries with high levels of government
debt would be useful because, in addition to ensuring monetary
stability, sustainable public finances are a sound basis for a
development and growth process.

6.4.2
Sustainable public finances are not to be achieved by
automatically reducing social expenditure but by optimising it
and making it more efficient and effective, in line with the prin-
ciple repeatedly upheld by the European Commission:
‘Social
protection is seen as having the potential to play an important role as
a productive factor, ensuring that efficient, dynamic, modern econo-
mies are built on solid foundations and on social justice’ (16).

6.5
Another feature of the ECOFIN Council's proposal docu-
ment and the ensuing reform of the Pact itself, by means of
Regulations 1055/2005 and 1056/2005,
focus on
pension reform. It devotes far greater space to the need to
reform Europe's pension systems (favouring the introduction of
a multi-pillar public and private system) than to the role the
public debt level should play in assessing Member States' fiscal
sustainability. One consequence of this is that countries which
have carried out such reforms are allowed to deviate from the
MTO or to overshoot the 3 % deficit threshold.

its

is

6.5.1
The document introduces the concept of ‘implicit liabil-
ities’ or liabilities incurred by the increased spending that awaits
the various countries in the near future because of their ageing
populations. This concept thus becomes part of the system of
criteria used by the Commission and the Council to assess the
sustainability of Member States' public finances. The problem
with this kind of approach is — as highlighted by Bouzon and
Durand — that there is no consensus on how these are defined
or what the definition could include (17).

7. The EESC's proposals for re-establishing European

economic governance

Regrettably,

in the course of

7.1
the reform process
launched by the Commission in the autumn of 2004 and
concluding with the reform of the Pact decreed by the Euro-
pean Council in the spring of 2005, the courage was lacking to

(16) Commission of the European Communities: 1995, 1997, 2003.
(17) ‘Potentially, the boundaries of these liabilities could extend far
beyond the simple pensions. According to an OECD document, in
some member countries, only the liabilities associated with the
pension system of public employees (for which there is a contrac-
tual relation), are included in the definition of public debt. This
seems to be the approach supported by the Ecofin report.’ (Bouzon
and Durand, 2005).

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11.4.2006

review and redefine the theory and ideology underpinning the
Pact. This timidity ruled out from the start any chance of radi-
cally transforming and of implementing the Pact (18). Such a
transformation is necessary in order to try to resolve once and
for all the sovereignty paradox that pervades the Pact (though
which also features in many other fields of European policy).

The paradox consists in having, on one side, nation
7.2
(representative bodies
states and the European Parliament
which have democratic legitimacy but no adequate economic
policy powers) and, on the other, bodies such as the Commis-
sion and the European Central Bank, which, though not having
direct legitimacy, nevertheless have sufficient economic policy
powers. Legitimacy without power is thus set against power
without legitimacy: a power which rests its legitimacy not on a
clear democratic process, but on a ‘doctrinal system’ on the basis
of which the role of governments is rendered ineffective. Over-
coming the sovereignty paradox involves moving away from
the stark division between legitimacy without power, on the
one hand, and power without legitimacy, on the other.

7.2.1
The criteria to be adopted for assessing sound
economic performance by the Member States are derived from
this doctrinal system and include a balanced budget, flexibility
of markets, structural reforms, and so on. These are the prin-
cipal goals of sustainable public finance which, unfortunately,
gain ascendancy over the final objectives of macroeconomic
stability, growth and full employment
the Lisbon
Strategy) (19).

(as per

In this particular respect, the reform of the Pact has
7.3
sought
to resolve the sovereignty paradox. The European
Council has in essence annulled the Commission's power of
surveillance and given it to a Council composed of the poten-
tial subjects of that surveillance. If one poses the question ‘who
supervises the supervisors?’, the rather embarrassed answer would
have to be ‘the supervised!’ The reform of the Stability and
Growth Pact seems not to have eliminated the democratic
deficit in the original Pact, but has compounded this short-
coming with another: lack of transparency and simplicity. It is
well worth asking here, what role the European Parliament
could play to strengthen the Pact's democratic legitimacy. Also,
along the same lines, we must consider what steps could be
taken to enhance the powers of and redress the balance
between the European Commission, Council and Parliament.

7.4
The reform of the Pact has been followed by a string of
events which have seriously undermined the EU integration
process, namely the ‘no’ votes in the French and Dutch

(18) Ibid.
(19) J.P Fitoussi, 2004.

referendums on the European Constitution, the decision to
suspend the referendum process in the other countries, and the
embarrassing failure to agree on the EU budget for 2007-2013.
It is as if the slow but inexorable process of putting together
the European jigsaw has been interrupted because each of the
Member States has decided to reshape the pieces to fit its own
national interests. Now the pieces will no longer fit together
and can only be placed side by side or even on top of one
another, leaving the picture largely incomplete and liable to be
destroyed the first time it is accidentally — or perhaps not so
accidentally — nudged by one of the parties to its con(de)struc-
tion.

7.5
It is at delicate moments such as that currently being
experienced by the EU, that choices need to be taken which
can move the debate on. For this reason, we should consider
whether it would be worth following the advice of Habermas,
as set out in his recent article (20). The German philosopher
shows how the EU today finds itself paralysed by the unresolved
conflict between diverse and irreconcilable conceptions of its objectives
and how the European institutions must both internalise this conflict
and bring it into the open, in order to find productive solutions. The
EESC welcomes the proposal to launch a political reflection
involving the EU's Member States on a voluntary and not
necessarily unanimous basis. This reflection should help over-
come the current stalled situation resulting from the need to
reach unanimous inter-governmental agreements in a European
Union of 25 Member States.

7.6
This reflection should be carried out using the instru-
ment of enhanced cooperation — as laid down in Articles 43 and
44 of the Nice Treaty — involving at least eight Member
States. While such cooperation allows joint decisions to be
reached by means of less restrictive procedures, it also remains
open since Member States may join the group at any time, in
accordance with Article 43b of the Nice Treaty.

7.6.1
One initial area where enhanced cooperation could be
applied is indeed Economic and Monetary Union. What neces-
sitates recourse to enhanced cooperation in the context of EMU
is the fact that the countries which are currently involved in
the single currency have an undoubted need to bring their own
economic policies into line with each other, unlike other coun-
tries which are not currently involved. Moreover, fiscal policy
is an integral part of economic policy, and so, as has already
been stated in other EESC opinions (21), measures adopted on
these issues in the euro area could facilitate greater economic
and social cohesion for the entire EU system.

(20) Habermas, J., 2005, Only a dream can save Europe, la Repubblica 9/

06/2005.

(21) ‘Taxation in the European Union: common principles, convergence
of tax laws and the possibility of qualified majority voting’ (OJ C
80 of 30.03.2004, page 139).

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C 88/75

The process of

7.8
strengthening European economic
governance requires the involvement of all Member States,
given that it represents an opportunity for EU growth.

7.9
The debate arising from the reform of the Stability and
Growth Pact has brought to light contradictions at the heart of
the EU's institutional framework.

7.10
Implementation of the Stability and Growth Pact must
involve efforts to clarify how we see the future institutional
framework of the EU. Only in this way can the Pact become an
instrument for ensuring economic growth — and therefore job
creation — preventing, at the same time, economic instability
in its various manifestations.

7.11
The difficult situation facing Europe today calls for
courageous decisions which would allow new impetus to be
given to the European idea espoused by the EU's founding
fathers and which today is entrusted to us.

For

the Stability and Growth Pact

to be applied
7.12
successfully and achieve its original objectives, there needs to
be broad consensus and support among the public, and not
just among EU institutions and national governments. To this
end,
the EESC intends to organise a conference over the
coming months, bringing together for a substantial and wide-
ranging discussion all those involved in this process, including
official decision-makers, civil society actors and the social part-
ners.

The President

of the Economic and Social Committee

Anne-Marie SIGMUND

7.6.2
EMU countries could appoint a coordinator or spokes-
person for EU Member States' economic policy who would be
tasked with coordinating European economic policies and who
would be given real power to do so. The coordinator would
work in collaboration with both the president of the European
Central Bank and the European Commission president.

7.6.3
Furthermore, members of the enhanced cooperation
group could decide to set up periodic hearings involving the
coordinator of
the
Commission, the Council, the European Parliament and the
European Central Bank.
to
redress the balance of power, which is currently weighted too
heavily towards the European Council.

the EMU enhanced cooperation group,

In this way, we could attempt

7.6.4
The coordination of EMU Member States' economic
policies must involve establishing a set of economic policy
priorities as well as instruments for achieving those objectives.
Provision should also be made for real-time monitoring to
enable necessary adjustments to be made along the way. In this
context, strengthening European economic governance must
involve support
for the macroeconomic dialogue and due
regard for the European social dialogue.

7.7
In addition to the solution provided by enhanced coop-
eration, it would be worth taking the advice given by Jacques
Delors in his 1993 White Paper (22), i.e., setting up a European
fund for furthering economic growth and increasing competi-
linked to strategic
tiveness, by issuing long-term EU bonds,
tangible and intangible infrastructure schemes. Moreover, the
development fund proposed by President Barroso seems to be
along these lines.

Brussels, 15 February 2006.

(22) Commission of the European Communities, 1993, White Paper on
growth, competitiveness, and employment: The challenges and
ways forward into the 21st century, COM(93) 700 final, Brussels, 5
December 1993.