The European Union's Structures and Procedures for Macroeconomic Policy Coordination - Do They Amount to a Form of "Economic Government"?

Macroeconomic Coordination – An Imperative

“To become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” was the main objective at the Lisbon European Council meeting in 2000 (European Commission, 2002). A decade later – in March 2010 – the Commission set a new strategic goal under the name “Europe 2020”. Achieving a “new economic policy coordination process” and again “smart, sustainable and inclusive growth” are the aims of this strategy announced by the Commission in 2010 (European Commission 2010). It becomes obvious that realising these goals requires harmonious coordination of macroeconomic policies.

Therefore, this essay explores the different structures and procedures in place to coordinate the macroeconomic policy in the European Union (EU). It will focus upon fiscal and monetary policy-making as well as the Broad Economic Policy Guidelines and the Stability and Growth pact against the background of current debates. Identifying gaps in the policy-making processes will be the emphasis of the first part whereas the second part will be devoted to the exploring whether a form of “Economic Government” exists. This essay argues that the discrepancy between supranational monetary policy-making and national fiscal policy-making is an obstacle to the achievement of “Economic Government”.

Due to increasing interdependence in form of institutions such as the Single Market and especially the introduction of the Economic and Monetary Union (EMU), coordination has become an imperative. In the view of the European Commission (2002), coordination of economic policies is highly desirable in order to “account for direct cross-border spillover effects of national policies on neighbouring countries”. For instance, policy decisions on a national level have an impact on the inflation and exchange rates, which in turn influences the European Central Bank’s (ECB) policy decision-making. Begg et al (2003) categorise arising expenses as social costs, as established fiscal policies become destructive to previously implemented guidelines and harm the stability of the overall coordination. Thus a coherent coordination system reduces social costs.

According to the Commission, the paramount objective of coordination is to (1) sound and stable the macroeconomic agenda and (2) optimise existing policies in place to respond to cyclical changes to ensure that economic growth is close to its capability (2002). The Commission emphasises that coordination is based on consensus and dialogue with exclusion of the binding rules of deficits. On the other hand, coordination should also prevent free-rider behaviour on the part of the Member States (EUROPA, Summary of EU Legislation 2007).

Fiscal Policy-Making and the Role of the Member States

Many decision-making bodies within the EU system help to achieve these objectives. Identifying the key players in the coordination process helps setting the basic understanding for the existing structure and its underlying procedures.

On the one hand, national governments are in control of their own fiscal policies with help of formal committees and councils. As the main decision-making body of the EU, the European Council set up the Economic and Financial Affairs Council (ECOFIN) that coordinates the policies of Member States in order to give guidelines at highest level and coordinate political priorities. The European Policy Committee (EPC) and the Economic and Financial Committee (EFC) support the ECOFIN Council in the form of economic analyses, opinions on methodologies, drafting of policy recommendations and structural policies (EUROPA, Summary of EU Legislation 2007). Member States are expected to exchange information, report and implement recommendations and decisions adopted by the ECOFIN Council. In order to ease the coordination between the economic and financial policies, the informal Eurogroup has been set up. It consists of Finance Ministers of the EMU Member States (Cini 2010).

An early study by Jacquet and Pisani-Ferry (2000 cited by Pisani-Ferry 2002, p.14) suggests that the Eurogroup should be given more authority by transforming it into an executive body authorised to participate by qualified majority voting (QMV).

Begg et al. (2003, p.75) argues that there is an “underlying institutional weakness” in the economic policy decision-making because agreeing on policy is burdensome in formal council settings (ECOFIN, EPC, EFC), whereas the Eurogroup lacks more formal standing.

Monetary Policy-Making and the Role of the ECB

On the other hand, the Eurosystem (enshrined in the Lisbon Treaty), as the central banking system of the euro area, comprises the most controversial institution regarding macroeconomic coordination - the European Central Bank (ECB) and the national central banks (NCBs) of the EU Member States. The ECB acts as an independent and supranational central bank in the field of monetary policy for the 16 countries that have officially adopted the euro as their currency. The European System of Central Banks (ESCB) incorporates the ECB and the NCBs of all 27 Member States (see Appendix 1, p.13).

The main aim of the ECB is to influence money supply and credit conditions. It sets the key interest rates and takes all decisions regarding the EMU (Cini 2010). The ECB acts independently to stabilise prices in the euro area. This independence makes the ECB vulnerable to criticism especially regarding its legitimacy and accountability. According to Verdun (2010 in Cini), the critique is developed in four steps. Firstly, she argues that no other central bank has more independence than the ECB, e.g. according to the European Treaty, the ECB is not allowed to take any instruction and concurrently no one is authorised to give instructions. Secondly, in order to change the mandate of the ECB, one has to change the Treaty. This, in fact, would require unanimity of heads of state and the government of all EU member states and even ratification by all EU national parliaments. Thirdly, for Member States it is difficult to check if the ECB pursues their interests as there are only a few checks and balances. The policy to secure prices and stability in order to keep inflation at a low level is under shared jurisdiction but the procedure (by which the ECB president reports to the European Parliament which in turn cannot give instructions to the ECB) impedes the executed control. In her last step, Verdun (2010) points out that there is no method to adjust imbalances through a supranational institution leading to the question of a uniform system with an equivalent economic institution. In comparison, a study conducted by Baldwin et. al (2001) argues that national central bank governors at the Governing Council of the ECB adopt a national perspective as it is inevitable to pursue self-interests.

With regards to exchange rate policy, the single currency automatically implies a single exchange rate policy. According to the European Central Bank (2009), “Euroland” was created as a new economic entity. The ERM II “provides the framework to manage the exchange rates between EU currencies, and ensures stability” which is supervised by the Council and the ECB together with the Commission (European Commission 2009). For countries that do take part in ERM II it is an “exchange arrangement that links the currencies of some EU Member States outside the euro area with the single currency“. For countries that do not participate in ERM II, the Maastricht Treaty takes effect whereas EU Member States have to “treat its exchange rate policy as a matter of common interest” (Smaghi 2009). All countries outside the EU are subject to a flexible exchange rate regime, which in turn means that the market determines the external value of the euro.

Overview of the Coordination Procedures

After analysing the structure of macroeconomic policy coordination in the EU, the procedures to secure harmonious coordination will be examined. Appendix 2 (p.14) indicates the configuration of macroeconomic policy coordination according to the European Commission. The Broad Economic Policy Guidelines (BEGPs) are the over-arching framework. The recommendations of the BEGPs are “further developed by more specialised procedures, which need to be consistent with the BEGPs” (European Commission 2002, p.6). These are the Stability and Growth Pact (SGP), the Macroeconomic Dialogue under the Cologne process, the European Employment Strategy under the Luxembourg process and the Economic Reform under the Cardiff process. As Appendix 2 points out, formal means of harmonisation between fiscal and monetary policy are flamboyantly missing. Noticeably, there is a provision for dialogue between these two policy areas but “no overt channels for joint decisions making” (Begg 2003, p.5).

To understand the enforcement of different policies, the EU uses two distinct modes of centralised coordination. These are hard policy coordination and soft policy coordination. The latter describes “guidelines, frameworks, communications, codes and even at times letters” (Cini 2001, cited by Begg et. al 2003, p.69). They are intended to balance policy credibility, political stability and policy flexibility (Begg et. al 2003). This approach stresses the concepts of policy learning and consensus building with benchmarking and peer review as mechanisms. In contrast, hard policy coordination is heavily influenced by the supranational level in the form of top-down policy formulation, which is then implemented by national authorities. The most striking difference to soft policy coordination is the enforcement of financial fines or penalties if Member States do not conform to agreed policies. This method is based on common commitment with aim to “guard against extreme political decisions” (Rawlinson 1993, cited by Begg et al . 2003, p. 69).

[...]