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Economic governance, not repairs, but a thorough overhaul

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Economic governance, not repairs, but a thorough overhaulMEPs steering new economic governance laws through Parliament leant their weight Monday to Commission and ECB efforts to stiffen budget rules and sanctions so as to prevent future debt crises in the Eurozone and restart growth. MEPs also proposed changes to enhance accountability and a sense of ownership, which they judge were sorely lacking in the first ten years of EU economic and monetary union.

Presenting their draft texts to fellow members of the Economic and Monetary Affairs Committee, the six rapporteurs stressed the need to make a significant break with the present model of economic policy co-ordination, not only to prevent similar debt crises in future but also for the long-term benefit of the EU economy.

To this end, the rapporteurs propose a stronger role for the European Commission at all stages of the various governance processes and reduce the scope for political back-scratching, by making it more difficult for Member States to vote down a Commission decision. They also say that more decisions should be made public and that various dialogues should be “instutitionalised”, e.g. by including “European Semester” economic policy co-ordination arrangements in the legal texts, by making Parliament a venue where Member States can explain their economic policy and budgetary positions, and by giving a greater say to national parliaments.

The rapporteurs argue that one fundamental flaw of the current system is that it lacks the transparency and sense of “ownership” needed to be perceived as a help and not a hindrance in achieving stronger national economies. They therefore urge that Council and Commission decisions be made public wherever the Treaty does not explicitly say otherwise, and press for more timely involvement of the European Parliament, particularly through the power to hold various hearings, including those where Member States can explain their policies and actions. Moreover, the draft reports propose that European Economic Semester vetting of national budgets be included in this legal package, so as to base the process on more solid grounds than just a code of conduct.

The Commission is also tasked with making regular visits to Member States to review the economic situation and identify risks or difficulties in complying with economic and fiscal objectives. The texts also say the Commission should be given a greater role in judging the suitability of a country’s adjustment efforts.

Finally, in order to handle future emergencies better, some of the draft texts propose establishing a European monetary fund managed under EU rules which would be financed by the fines and related interest earned, and possibly other resources. This mechanism, they say, would be a mechanism better suited for the long term than the current intergovernmental bailout mechanisms.

Economic governance must be based on a system that does not allow Member States room to negotiate their way out of reforms and ultimately evade sanctions, say the draft texts. The current system, whereby Member States may collude to turn a blind eye to each others’ financial troubles, must be done away with.

The rapporteurs therefore place a strong and independent Commission at the heart of the new governance model and empower it to pay surveillance visits to Member States to ensure that corrective action is being taken. They also reinstate the automaticity of sanctions, following a push by Member States to have this diluted, and in some instances go further than the original Commission proposals with regard to fine amounts and types.

Penalties for persistent economic imbalances, for example, could now be as high as 0.5% of a country’s GDP (here the Commission initially proposed only 0.1%), and countries attempting to hide parts of their financial data would face a new fine of 0.5% of GDP. The draft texts also make it more difficult for a Member State to apply for a reduction in any fine imposed upon it. Incentives to obey fiscal rules, e.g. via the creation of Eurobonds, could also be envisaged, proposes one report, whereby fiscally-sound Member States or those with committed reform would be able to take part in the process of issuing common bonds on a part of their debt.

Procedures potentially leading to sanctions, and the imposition of sanctions themselves, must be streamlined, argue the draft texts, primarily by removing the scope for Member States to vote down actions proposed by the Commission. So in most cases, a Commission decision would be applied unless Member States specifically decided to reject it.

The draft texts also place greater emphasis on the need to use economic governance to promote growth, e.g. by ensuring complementarities between economic governance instruments and those aimed at promoting jobs, growth and investment.

The draft report on macro-economic imbalances, for example, proposes that Member States be required to ensure that their measures to address potential imbalances are compatible with EU growth and jobs targets. Another report suggests that Member States whose financial houses are in order should receive extra funding to meet these targets.

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