JPF FT - Com 2206

Towards a system to secure the euro
By Jean Pisani‐Ferry (Financial Times) 22 June 2010
Eurozone governance was for long a name without a game. The crisis, however, has
brought clarity and, by common consent, discussions are focusing on three topics:
strengthening of budgetary discipline; surveillance of the eurozone countries’
competitiveness; and provisions for crisis management.
This is a sensible agenda. The failure of surveillance over the last 10 years needs to be
remedied because, in spite of multiple procedures, it was markets, not peer pressure,
that in the end forced adjustments. It needs to be rebalanced because the exclusive focus
on public accounts distracted attention from bubbles in the private economy. And it
needs to be complemented because the belief that crisis prevention made crisis
management superfluous was proved wrong by events.
However, the devil is in the detail. On budgetary discipline, the consensus in the
European Council is that there is first and foremost a need for more sanctions. Yet the
Greek disaster did not result from a lack of sanctions but from not checking the data
reported. Ireland’s and Spain’s problems did not come from ignoring the EU’s stability and
growth pact either but from the fact that it took no account of risk. When a country’s
budget balance can move from a 2 percent surplus to an 11 percent deficit within the
space of two years, sanctions that kick in when a three‐percent deficit threshold is
crossed, or even before, are ineffective. What is needed is to stress‐test budgets and
adopt a ‘policy‐at‐risk’ approach whereby buffers are adopted in proportion to the risks
involved.
A deeper problem is that top‐down budgetary discipline does not work. Countries flout
the rules as long as they do not perceive them as national imperatives. Here, however,
market pressure and Berlin’s decision to enshrine a budget rule in the constitution now
combine to offer a chance for bold reform. Each government anxiously monitors bond
spreads vis‐à‐vis the German Bund and looks for ways of reducing them. As suggested in a
recent European Central Bank paper, the EU should grasp this opportunity, embrace
decentralisation, and cut some slack for member countries equipped with home‐grown
definitions of budgetary discipline, provided these are coherent with common aims. Such
national rules need to be effective, but they do not have to be carbon copies of the
German rule, because effectiveness depends on suitability to the country’s institutional
context.
Competitiveness is second on the agenda. The European Commission was right to say
that there is a need for better monitoring procedures. But the temptation will inevitably
arise to copy the stability pact and define thresholds. Whereas the ‘traffic lights’
© Bruegel 2010 1
approach proposed by the ECB may help structure the policy discussion, a mechanical
approach would be wrong. First, competitiveness and imbalances are multilateral in
nature: it would be mistaken to ignore the fact that one country’s minus is another’s plus.
Second, it is impossible to say what a ‘good’ deficit is, as all depends on how it is financed
(eg by foreign investment or bank credit) and what its domestic counterpart is (eg capital
expenditure or consumption). So thresholds cannot determine policy.
Rather, there is a need for authoritative, risk management‐oriented analysis of economic
developments. Third, avoiding imbalances is set to become an additional objective in the
eurozone, on top of budgetary discipline and financial stability. Serious thinking is needed
on how all three combine within the overall policy framework.
The third issue is crisis management and resolution. With the creation of the European
Financial Stability Facility and the agreement on involving both EU institutions and the
IMF in assistance, a big move has been made towards defining a crisis management
regime. This is the good news. But as often pointed out by German observers, a policy
system remains incomplete as long as the procedures for crisis resolution remain vague.
To get the policy incentives right, the endgame needs to be specified. Now that the fiction
of a no‐assistance system has been abandoned ‐ and rightly so ‐ the full definition of a
crisis resolution regime is logically part of the reform agenda. This imperative should not
be ducked.
The broader remaining question is the institutional one: how should Eurozone
governance be organised? The crisis was indicative of the failure of procedures but also of
the institutions in charge of surveillance and collective action in times of stress. The
system now combines several institutions, none of which is in a position to take the reins:
the Commission lacks the power it derives from the treaty in other fields like
competition; the Eurogroup has consistently been short on foresight and initiative; the
new Council Presidency is not designed to permanently specialise in Eurozone
governance; French ideas for regular Eurozone summit meetings and a Eurogroup
secretariat have been ditched; and whatever clout the ECB has gained from the crisis, it
would be dangerous for its legitimacy to let it embark on mission creep. So the
institutional question remains unsettled. This state of affairs is probably here to stay,
which is not good news. At least, efforts should be made to create a moral authority with
the ability to speak the truth and a chance to be heard. This is why the ECB’s proposal for
an independent surveillance authority within the Commission deserves serious
discussion.

© Bruegel 2010 2

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Towards a system to secure the euro

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