A Constitutional Treaty for an Enlarged Europe: Institutional and Economic Implications for Economic and Monetary Union

As the negotiations on the Treaty establishing a Constitution for Europe have been concluded and the Paul Schmidt Constitutional Treaty1 has been signed by the Heads of State or Government of the Member States of the European Union (EU), the Oesterreichische Nationalbank (OeNB) organized an international workshop held on November 5, 2004, in Vienna. The workshop gave an overview of the institutional implications the Constitutional Treaty may have for Economic and Monetary Union (EMU). Furthermore, speakers analyzed the institutional framework for financial stability in Europe and the role fiscal policy and the Stability and Growth Pact play in an enlarged Europe.

In his opening remarks, Josef framework conditions directly influ- Christl, executive director of the ence the OeNBs daily work. OeNB, stressed how important the Rene« Smits, professor at the Uni- Constitutional Treaty, which aims at versity of Amsterdam, held the key- rendering the enlarged EU more note speech at the workshop, in which effective, transparent and democratic, he outlined the structure of the Con- was for European integration. Accord- stitutional Treaty. According to Smits, ing to Christl, the process of ratifying the Constitutional Treaty contains the Constitutional Treaty will be a only minor changes to the institutional great challenge but, at the same time, framework of EMU; first and fore- presents an opportunity to put the most, it reconfirms the ECBs inde- debate about the future of the Euro- pendence and, at the same time, pro- pean Union into a broader perspective vides for its formal integration into and to bring the European integration the institutional framework of the project closer to the people. EU. Furthermore, the Constitutional Now that the EU has been success- Treaty states that members of the fully enlarged, the new constitutional Executive Board of the ECB have to architecture should be used to deepen be appointed by a qualified majority the European integration process. The and that the Council of Ministers has euro as the single currency plays a to take decisions based on a double key role in this respect, serving as majority system. It also formally uses a catalyst for political integration the terms Eurosystem and Eurogroup, and continuous economic reforms. It introduces the function of a president represents a successful step toward of the Eurogroup, puts forward that integration and stands for both unity euro area Member States are to have and variety within Europe. more powers, and contains a declara- The OeNB, as an integral part of tion by the Heads of State or Govern- the European System of Central Banks ment on the Stability and Growth (ESCB), has been closely following Pact. the debates in the Convention on the According to Smits, the so-called Future of Europe, as well as the exit clause only partially defines the negotiations at the Intergovernmental course of action for Member States Conference, and has participated in wishing to leave the European Union drawing up ECB opinions. The OeNB and fails to provide a withdrawal Refereed by will continue to analyze institutional procedure. The Constitutional Treaty Michael Wu‹ger, and legal changes relating to EMU; takes an intergovernmental approach, Austrian Institute of after all, the changing European introducing an EU foreign minister Economic Research (WIFO) (October 2004). 1 In the following, the Treaty establishing a Constitution for Europe will be referred to as Constitutional Treaty.

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and the election of a European Coun- system, de facto integrates the Euro- cil president and principally holding group and introduces a longer-term on to the rotating EU presidency. president of the Eurogroup, thus By extending the scope of the code- changing the current system of mul- cision procedure, it renders the Euro- tilevel economic governance in the pean Parliament more influential. The EU. As heterogeneity among Member European Commissions role as a States has increased with enlargement, motor of integration is only slightly the euro area is more and more turn- expanded. ing into a center of gravity for inte- According to Smits, the Constitu- gration. tional Treaty simplifies all treaties Whether or not the Constitutional established so far; nevertheless, com- Treaty will render the decision-mak- pared with the U.S. Constitution, ing process more efficient will only it is still complex. The stipulated be revealed when the treaty comes amendment procedures do not exactly into effect. At any rate, introducing facilitate the evolution process of the a double majority system signifies a Constitutional Treaty. One has to radical departure from the previous accept that creating a constitution is voting system. a continuous and dynamic process. The Constitutional Treaty does Smits considers the current document not contain any substantial changes a successful step toward integration with regard to monetary union, as but calls for further steps to follow. most of the changes are of a technical nature only. It reaffirms the frame- From Maastricht to the work conditions for monetary union Constitutional Treaty: as embodied in the Treaty on Euro- Are there Fundamental pean Union. Changes for EMU? Fritz Breuss, professor at the Isabella Lindner and Marlies Stubits, Vienna University of Economics and OeNB, presented a study in which Business Administration, stressed the they examined how multilevel eco- intergovernmental character of the nomic governance in the European Constitutional Treaty. He warned that Union is affected by the Constitu- extending the powers of the Euro- tional Treaty and which implications group and introducing a president of these effects have for EMU in terms the Eurogroup could be a source of of effectiveness and efficiency. They conflict among the Ecofin Council, argue that the Constitutional Treaty the Eurogroup and the ECB. Eco- may improve the EU-25s ability to nomic policy coordination, whose act on both the European and the core element is the Economic and international level by providing for Financial Committee, remains com- stronger personalization of the EUs plex and cumbersome. Breuss said institutions and the Eurogroup and he was wondering whether this type by reducing the size of the European of coordination ultimately has more Commission. advantages or disadvantages. He de- Furthermore, the Constitutional clared the European Commission the Treaty lays down several new provi- big loser in the bargaining game for sions and voting rights pertaining ex- the distribution of powers among the clusively to the euro area Member European institutions. States. It also formalizes the Euro-

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The Institutional Setting legislation more consistently and by for Financial Stability in converging supervisory practices. In Europe terms of stability, a European supervi- Holger Wolf, professor at Georgetown sory authority seems to be a realistic University, spoke about the challenges solution, but only in the long run arising from financial integration con- and only if organized on a decentral- cerning the institutional setup of ized basis. Hrdlicka said that a two- financial market supervision. In view tier supervisory structure could cause of the increasing number of cross-bor- numerous problems. der and cross-sector financial institu- tions, Wolf advocated a two-tier sys- Fiscal Policy and the tem consisting of an EU authority Stability and Growth Pact responsible for supervising large in an Enlarged EU European financial institutions and Stefan Collignon, professor at the Lon- national authorities supervising only don School of Economics, advocated institutions that primarily operate in establishing coherent fiscal policies at the domestic markets. When and the EU level to optimize the European how such a structure should best be monetary and fiscal policy mix. There implemented is a much more difficult are more advantages than disadvan- issue. Since the number of institutions tages to centralizing public finances operating EU-wide remains low, and (welfare and stability gains) while as Basel II brings about a range of allocating budgets on a decentralized substantial changes, a gradual transfer basis (efficiency gains). of supervisory powers to the current The EU budget must have demo- coordinating bodies (evolutionary ap- cratic legitimacy, and costs must be proach) would be desirable. allocated more evenly. According to When it comes to crisis preven- Collignon, net contributors are more tion and the allocation of costs for prone to undergo excessive deficit lender-of-last-resort (LOLR) opera- procedures in times of economic tions, however, a formal framework downturns than net recipients, as, ac- should be established as quickly as cording to the rules for excessive def- possible. According to Wolf, scenarios icits, net transfers from — as opposed in which large international banks to net payments to — the EU are not with their headquarters in a small taken into account. Having its own EU Member State experience prob- source of funding (EU tax) would lems which exceed the national cen- equip the EU better for its negotia- tral banks capacities are by all means tions on the financial perspective; in- realistic. A lack of clearly defined terregional transfers could be con- structures may potentially cause mar- ducted via tradable deficit permits. ket uncertainties. Elections to the European Parliament According to Karin Hrdlicka, would thus determine decisions on OeNB, the moment for changing the how to use European taxpayers supervisory architecture has not yet money. They would ensure that the come. Furthermore, the level 3 Lam- EU budget reflects the preferences falussy committees have been estab- of the majority of citizens and over- lished only recently, mainly to address comes individual interests. Discussing challenges arising from the integra- and voting on the budget in the Euro- tion process by implementing EU pean Parliament, with proposals from

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the Commission and the consensus budget is by all means justified and of the Council (depending on the corresponds to the fragile institutional legislative procedure), would foster balance within the EU, as well as to European democracy and identity. the current level of European inte- Jose« Marin, ECB, pointed out that gration. Marin said that for most there were different definitions of EU Member States implementing a federalism in Europe. The current more fiscal policy-oriented federalism expenditure structure of the EU would currently not be acceptable.

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