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Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions

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Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions Sylvia Gloggnitzer, The institutional framework and the tools for economic governance provided by the Treaty of Isabella Lindner1 Lisbon were inadequate for preventing or resolving the recent banking and sovereign debt crisis in the EU. For instance, the Treaty did not provide any instruments for stabilizing euro area finances, and the existing economic governance instruments, such as the Stability and Growth Pact or the Broad Economic Policy Guidelines, were not applied adequately by the Member States. In addition, the institutional decision-making procedures foreseen by the Treaty proved too sluggish during the crisis. Therefore, most of the measures taken to remedy the situation were agreed through intergovernmental decision-making, with the European Council evolving as the key player in the governance process, rather than through standard EU procedures (with the “Community Method”). The deepening of euro governance, alongside the EU governance framework, resulted from the fact that the euro area required a coherent and efficient economic governance structure. The willingness to offer financial solidarity within the euro area correlates with the willingness of distressed Member States to implement sustainable national fiscal policies. To ensure the long-term success of the euro, the euro area will, however, have to adopt a common overall strategy that adds more value to its economic success as an entity. JEL classification: G01, N14, O52 Keywords: EU economic governance reform, financial stabilisation, Treaty of Lisbon, intergovernmental decision Overcoming the banking and sovereign Article 3 of the Treaty on European debt crisis in the EU and in the euro Union (TEU) lays down economic pol- area has put both the economic policy icy objectives for the EU, including strategies of the EU and of its Member “balanced economic growth and price States as well as institutional decision- stability, a highly competitive social making to a severe test. The principal market economy, aiming at full em- conditions governing the Economic and ployment and social progress.” EMU is Monetary Union (EMU) framework based on an independent monetary pol- laid down in the Maastricht Treaty have icy oriented toward stability, whose not been adapted. They thus remain the primary objective is to maintain the statutory framework on the basis of price stability of the euro under Article which measures may be taken at the EU 127(1) of the Treaty on the Functioning level to combat the sovereign debt of the European Union (TFEU). When crisis. The economic policy framework founding EMU, the Member States en- in place certainly contains provisions tered into a binding agreement that fis- whose expedient implementation could cal and economic policy would remain have mitigated or even prevented the a national responsibility. The fiscal pol- current effects of the crisis (Wieser, icy framework laid down in the Treaty 2011; Koll, 2011) – had all the Member of Lisbon and compliance with the Sta- States, especially the euro area coun- bility and Growth Pact were designed tries, observed their self-imposed eco- to secure the stability-oriented single Refereed by: monetary policy. Article 125 TFEU – Ernest Gnan, OeNB; nomic policy constraints. Gregor Schusterschitz, Austrian Federal 1 Oesterreichische Nationalbank, European Affairs and International Financial Organizations Division, Ministry for European [email protected], [email protected]. The authors would like to thank Ernest Gnan, Harald and International Affairs Grech, Maria Oberleithner and Gregor Schusterschitz for valuable suggestions and comments. 36 MONETARY POLICY & THE ECONOMY Q4/11 Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions the “no bailout” clause – in combina- nomic policy interests. To remedy this tion with Article 123 TFEU – the pro- situation, the EU has since taken mea- hibition of monetary financing of bud- sures to enhance its economic gover- get deficits – is considered the nance framework. Moreover, the euro prerequisite for fiscal discipline in all area has been criticized for its ineffi- Member States and for the functioning cient and slow crisis management and of monetary policy (Potacs and Mayer, its sluggish crisis communication. The 2011). Otherwise, the Member States public and financial markets have de- could be tempted to pursue unsound cried the lack of clear solutions and fiscal policies because they would not have been confused by intransparent have to bear the consequences of such decision-making. The establishment of policies alone – such as high risk premi- a separate euro governance structure ums on their sovereign debt or the shall rectify this situation. inaccessibility of market financing. The This article provides an overview of above-mentioned fiscal discipline rules the financial and economic policy mea- should be applicable both to economic sures taken from fall 2008 to fall 2011 governance under normal circum- in response to the sovereign debt crisis. stances and to crisis management. A preliminary review of the reforms is Many critics have noted that the made on the basis of the standard EU Treaty of Lisbon did not contain suffi- procedures as laid down in the Treaty cient provisions for preventive crisis of Lisbon and the initiatives taken by management (e.g. Breuss, 2011). Actual Member States. Perspectives for future crisis management and considerations developments are assessed. for long-term crisis prevention have indeed brought to light institutional 1 The Treaty of Lisbon as the and structural shortcomings that the Point of Departure for Crisis EU and the euro area have begun to Resolution and Reform address. Among other things, the Treaty 1.1 EMU Institutional Framework of Lisbon does not explicitly establish and Governance during the financial solidarity among the Member Crisis States; only in the event of a serious On December 1, 2009, the new consti- threat caused by natural disasters or tutional basis for the EU, the Treaty of exceptional circumstances can a Mem- Lisbon,2 entered into force. The Lisbon ber State receive EU financial assis- Treaty applies to an enlarged EU of tance under the provisions of Article 27 Member States with 502.5 million 122(2) TFEU. To fill this gap, the euro EU citizens (Eurostat, 2011) and is area took the initiative to establish a intended to ensure a more efficient stability mechanism under which finan- functioning of EU institutions. To what cial assistance may be granted to dis- extent does the Treaty of Lisbon repre- tressed euro area countries. Burden- sent a suitable legal and institutional sharing during crisis between Member basis for efficient crisis resolution? States with sound economic policies Which EU bodies are involved in crisis and those with unsound practices and management, and how do they inter- between monetary policy and fiscal act? policy has revealed contradictory eco- 2 The Treaty of Lisbon consists of the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU), including the annexed protocols and declarations (OJ C 83, 30. 3. 2010, p. 1). MONETARY POLICY & THE ECONOMY Q4/11 37 Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions 1.1.1 European Council and became evident that the euro area Euro Summits would require a coherent approach to The First European Council was held in financial and economic crisis manage- Paris in 1961 at the behest of Charles de ment. As early as October 12, 2008, Gaulle, then President of France. The Nicolas Sarkozy, then President of the Treaty of Lisbon formalized the Euro- EU Council, convened the historical pean Council and transformed it into first European Council of the Heads of an institution of the EU.3 Meetings of State or Government of the euro area the European Council are attended by countries, the first Euro Summit the Heads of State or Government of (Schwarzer, 2009). The subsequent the 27 EU Member States, its Presi- “Franco-German proposal” 4 for stron- dent, the President of the European ger economic and institutional gover- Commission and the President of the nance of the euro area provided for reg- European Central Bank (ECB). As a ular meetings – at least two a year – of rule, decisions are taken by consensus. the Heads of State or Government of The European Council does not exer- the euro area countries (“gouverne- cise a legislative function (Article 15(1) ment économique”).5 The Euro Sum- TEU). Electing a full-time president of mit of October 26, 2011, expanded this the European Council for 2½ years is proposal to improve the governance of intended to enhance consistency and the euro area (chart 1). The measures continuity in the political management were aimed at strengthening economic of the EU, as the political guidelines policy coordination and surveillance and priorities for EU action are decided within the euro area, improving the ef- top-down by the European Council fectiveness of decision making, and en- (European Policy Centre, 2011). In suring more consistent communica- EMU, the coordination of economic tion. In the past, the authorities often- policies and employment policy pro- times sent mixed messages about grams also follows policy orientation complex decisions to financial markets given by the European Council; the and the public. The Euro Summit on European Council moreover assesses October 26, 2011, therefore decided the implementation of these programs. that its President together with the These functions indicate the key role President of the European Commission the European Council plays in EU crisis would be in charge of communicating management. While the Heads of State decisions. The President of the Euro- or Government used to come together group together with the Commissioner four times a year, they met more often for Economic and Monetary Affairs will during the crisis, many times at short be responsible for communicating the notice.
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