INTERNATIONAL ECONOMICS PROGRAMME IEP BP 05/02

FEBRUARY 2005

European Economic Governance Forging an integrated agenda Erik Jones

Summary

• Recent reactions to the European Commission’s proposed ‘Social Agenda’ suggest that President, José Maria Barroso, is retreating from his business-friendly strategic objectives. Such criticism implies that the Commission President can choose between business and labour. The reality is more akin to ‘all or nothing’. If Barroso cannot garner support from both business and labour, he is unlikely to be able to satisfy either. • Barroso’s all-or-nothing situation is structural, not political. The centre-left complexion of the European Parliament is not the problem. Neither is Barroso’s alleged intergovernmentalist tendency. Rather, Barroso’s economic programme is complicated by the interactions between different European projects. Specifically, European economic integration builds on three agendas: • a Maastricht Agenda to create a zone of macroeconomic stability that is conducive to growth; • a Lisbon Agenda to preserve European social models by forging EU member states into the world’s most competitive and dynamic knowledge-based economies; and • a Laeken Agenda to build popular support for integration by bringing ‘Europe’ closer to the people. • Although often treated as separate, the three agendas are tightly interrelated: the achievement of macroeconomic stability depends on the success of market- structural reform within the member states, and the success of market-structural reform depends upon the maintenance of popular support. • The interaction between different European agendas is specific as well as general. For example, the credibility of European macroeconomic coordination depends more on how the Stability and Growth Pact is explained than on how it is reformed. Changing the rules may or may not be necessary. Clarifying how they function is essential. • Above all, Europeans must recognize that they have one macroeconomic framework but twenty-five different social models. Hence the real challenge facing BRIEFING PAPER BRIEFING PAPER the Barroso Commission is not just to build a business-friendly Europe. It is to create a business-friendly environment that is consistent both with the requirements for macroeconomic stability and with the aspirations of diverse member states. Europe must be stable, it must be competitive, and it must be legitimate. Failure in any part of this three-way agenda means failure overall. 2 European Economic Governance: Forging an integrated agenda

This briefing paper is organized in four sections. Introduction The first sets out the three agendas at work behind the The new European Commission President, José Maria process of European economic integration. The second Barroso, has made three major policy pronouncements explains how these agendas intertwine. The third in as many weeks. He outlined his ‘strategic objective’ illustrates the practical (or policy-specific) implications ‘to put Europe back on the path to long-term of this interdependence between European projects. The fourth section draws conclusions. prosperity’ on 26 January 2005.1 He declared his commitment to put growth and jobs at the forefront of his economic programme on 2 February.2 And he Europe’s three economic agendas announced his goal of ‘strengthening citizens’ confidence’ in the European Social Agenda on 9 European economic integration centres on the single February.3 Critics of Mr Barroso – like those at UNICE4 – internal market and the common external commercial claim that this combined agenda works at cross- policy. Europe is strongest when breaking down the purposes. Of course it is easy to support prosperity as a barriers between countries, policing competition across goal. But it is hard to ignore the threat of them, or negotiating with third parties (such as the contradiction between Barroso’s Social Agenda and his United States) on their behalf. Such work was commitment to jobs and growth – particularly when reinvigorated with the ‘1992 Project’ embedded within the Commission emphasizes the development of labour the Single European Act and is the essential market legislation at the European level and the foundation for the ‘relaunching’ of Europe in the promotion of transnational collective bargaining. 1980s. Moreover, much remains to be done in order to Such criticism of Barroso’s policy programme risks ensure that the internal market is as open, as inclusive missing the woods for the trees. Of course European and as well-represented as possible. The internal regulation and transnational collective bargaining market needs to be deepened in areas such as the could be problematic for growth. But recent service trade, enlarged to embrace both new member experience of attempts at transnational bargaining states and those waiting to join, and its interests either in northern Europe (following the defended in fora such as the World Trade Organization September1998 Doorn Declaration) or across the metal- or the Doha Round of multilateral trade talks. working industry suggests that they are not. At Doorn, Since the start of the 1990s, however, the core for example, the national trade union federations of economic responsibilities of the European Community the Benelux countries and agreed to have not dominated the European agenda. Obviously coordinate bargaining to prevent competitive the internal market remains fundamentally important. distortions under the single currency.5 Such efforts Nevertheless, the ‘economic community’ is more have not ratcheted up wages or created undue rigidity representative of what the European Union is than in national labour markets. While national trade what it aspires to become. Meanwhile the agendas unions attach great significance to their European that have come to dominate the process of European endeavours, they seem to operate with careful economic integration all strive to build on the success attention to their own economic self-interest and that of the internal market for reasons that are at the same of their members – as we should expect. Hence, the time progressive and defensive. These agendas are to challenge for policy-makers is not to fend off the improve the internal market against the danger that it unions but rather to enlist their support as partners for might otherwise fall apart. change. This is in fact what Barroso’s ‘Social Agenda’ is all about. The Maastricht Agenda Much of the criticism of Barroso’s social agenda The first of these new agendas was agreed at derives from the mistaken belief that European Maastricht in December 1991.6 The decision was to economic policy-making is dominated by a contest create an economic and monetary union (EMU) in between regulation and markets, labour and capital, Europe, culminating in the issue of a single European left and right. The tug-of-war in the European currency (the euro). But the goal was to establish a Parliament over the approval of Barroso’s Commission zone of macroeconomic stability within the single colleagues only fuelled such misperception. However, market that would be conducive to long-term the real dilemma facing Barroso is much deeper and investment and growth. The single currency was not the stakes are much higher. If he is to achieve the goals essential to this goal – it was only one instrument set out in his three policy pronouncements, Barroso among many. By the same token, the process of will first have to succeed at combining the three major convergence that would-be participants in EMU had to agendas underpinning the process of European follow was not essential to the creation of a single economic integration. In essence, he must nurture European currency. Adherence to the various criteria macroeconomic stability, microeconomic efficiency and for reducing inflation, interest rates, exchange rate popular legitimacy all at once. As recent evidence volatility, government deficits and public debts suggests, failure in any one of these areas risks failure (including the reference values of 3 per cent and 60 overall. The problem is exacerbated by the weakness of per cent that continue to attract such attention) was the instruments that the European Commission has to only one possible route to economic and monetary hand. Hence while it is important that Barroso lay out union. a clear strategy for success, it is also important that he The combination of Maastricht-style convergence manage expectations as to what measure of success he and the single currency supported a particular type of can realistically achieve. economic and monetary union: one devoted to the European Economic Governance: Forging an integrated agenda 3 establishment of lasting macroeconomic stability across limited to economics. Nevertheless it has an important the internal market. In turn, this macroeconomic economic dimension. As market integration deepens stability would accomplish two objectives at once: it and widens, it is important that European citizens would protect the internal market from unnecessary recognize the value of liberal competition. Europeans volatility or manipulation; and it would lower the cost must be willing to abandon economic nationalism for a of capital and encourage investment across Europe as a European alternative. They must be willing to accept whole. When the Maastricht Agenda ran into trouble the national implementation of European legislation. during the early-to-mid 1990s in the form of And they must support national participation in heightened volatility and slower growth, the European collective decision-making – particularly under response was to strengthen the rules for policy qualified majority voting and therefore particularly convergence and to push on with the introduction of concerning the economic community at Europe’s core. the euro. As with Lisbon, the Laeken Agenda emerged from the disappointments of the mid-to-late 1990s. Public The Lisbon Agenda opinion polling data revealed persistently low levels of The second major European economic agenda was enthusiasm for European integration.12 Aggregate announced at Lisbon in March 2000.7 The headline turnout in elections for the European Parliament goal is to transform the internal market into the declined secularly from one contest to the next.13 And world’s most competitive and dynamic knowledge- national politicians experienced a string of unpleasant based economy. This agenda works at a policy level surprises in popular referenda: losing support for and within a time-frame that is completely different ratification of the Maastricht Treaty in Denmark in from Maastricht. The Maastricht Agenda aims to June 1992; narrowly receiving support for Maastricht in provide a long-term solution to problem of the following September; and losing support macroeconomic stability across the internal market as a for the December 2000 Nice Treaty in Ireland in June whole. Indeed, even those countries that have opted 2001. Although such surprises did not result in out of the single currency (like those that have yet to permanent setbacks, Europe’s politicians recognized join) accept that macroeconomic policy-making the danger that future reversals might be more remains a matter for common concern. The Lisbon difficult to overcome. agenda calls for more immediate action and places the emphasis on reforming market structures (called ‘market-structural reforms’) within the member states. Interdependence When Maastricht was announced in 1991, the goal was The three European agendas – Maastricht, Lisbon and to have all the instruments in place by the end of the Laeken – have different origins and different decade so that growth and investment could follow. emphases. Nevertheless, their success is closely When Lisbon was announced, the whole agenda was intertwined. Macroeconomic stability depends upon to be accomplished in ten years. market-structural reform. Market-structural reform The origins of the Lisbon Agenda lay in the depends upon popular support. And popular support frustration of European policy-makers with the poor depends on macroeconomic performance – meaning economic performance of the mid-to-late 1990s8 – stability, jobs, growth and competitiveness. These performance that failed to improve despite efforts to connections were not anticipated. They remain vital complete the internal market and perhaps because of nonetheless. efforts to promote macroeconomic stability. European leaders made a political commitment to tackle the Stability and reform problem of unemployment at the Amsterdam The European Central Bank (ECB) President includes a European Council summit in June 1997,9 followed by a few sentences on the need for market-structural more practical commitment in the reform in the final paragraphs of every opening 10 following November. In both cases, the emphasis was statement for his monthly press conferences on on European support for national efforts to make monetary policy in the eurozone.14 His reasons for market structures more efficient. Most economists concern are threefold: regard unemployment as a local or national phenomenon and so expectations from these European 1. Differences in market structures play an commitments were low. Being low, they were also important role in explaining the wide disparities in easily exceeded. Hence politicians began to deepen the price inflation and growth rates across the member agenda even before substantial progress could be states of the eurozone. In turn, the variation in measured. As European economic performance economic performance across countries makes it improved in 1998 and 1999, expectations mounted. difficult for the ECB to strike a balance between The Lisbon goal of forging a world-beating economy is ensuring price stability and supporting the the result. economic policies of the member states. The Laeken Agenda 2. Differences in market structures – particularly The third new agenda was announced at a European financial market structures and corporate balance Council summit held in the Belgian city of Laeken in sheets – influence the way different countries 11 December 2001. The goal is to bring Europe closer to respond to monetary policy changes. As a result, the people, to strengthen perceptions of legitimacy efforts by the ECB to fine-tune monetary policy- and to bolster popular support. This goal is hardly 4 European Economic Governance: Forging an integrated agenda

making have a disproportionate impact in some draw support from each other and from the member states over others, with potentially Commission in implementing domestic reforms. Both undesirable effects. Monetary policy thus becomes peer pressure and Commission monitoring are meant a very blunt instrument, which explains why the to underscore the importance of specific market- ECB is often slow to change interest rates. structural reforms for the future of Europe as a whole. However, this all assumes that the citizens in the 3. Market-structural reform is necessary to various member states accept the importance of improve fiscal performance and therefore to Europe. If they view Europe with indifference or strengthen compliance with the Stability and hostility, then they are likely to regard peer pressure or Growth Pact. Regardless of whether they can Commission monitoring as an intrusion rather than as bolster underlying growth rates, Germany and an encouragement. In such a case, the instruments France must undertake significant welfare state used in the open method are more likely to work reform if they are to bring their deficits under against reform than for it. control. Meanwhile, the ECB has difficulty relaxing monetary policy so long as the eurozone’s two Support and performance largest economies are running excessive deficits. The bulk of public opinion polling analysis suggests that people support European integration (and Given the price-stability mandate of the ECB, there perhaps also identify with ‘Europe’) when they feel is a clear priority among these concerns, with fiscal that they stand to benefit from the process.18 consolidation at the top and variation in inflation rates Moreover, the relationship between benefit and at the bottom. Taken together, however, they suggest support holds across the EU. It makes a difference both a complicated agenda for market-structural reform. in the United Kingdom, where support for membership is typically low, and in Luxembourg or , where Reform and support support for membership is high. This benefit does not The problem is that market-structural reform is never need to be narrow and financial. Direct transfers from easy. Too often the costs of any reform fall the European Union are neither necessary nor – as the disproportionately on small and clearly identifiable 2001 referendum result in Ireland suggests – even groups while the benefits accrue much more vaguely sufficient. But the benefit to be had from Europe does to the economy as a whole. In such a context, small need to be perceived as important. groups are much more able to block reforms than The notion of perceptions is complicated because it governments are able to implement them.15 This suggests that the European Union may be judged for explains how public-sector workers hold on to whatever the people think it should be doing as generous pensions, how train drivers continue to opposed to what it actually does. Hence, for example, qualify for early retirement, and so on. If the almost 60 per cent of respondents in the EU-15 government is to succeed at fostering reform, it must regarded ‘employment’ as the most important issue in attach such reform to some larger or more clearly the 2004 elections for the European Parliament.19 The identifiable project that can be used mobilize popular fact that the European Parliament has little or no support. ‘Efficiency’ by itself rarely suffices as a call to influence over employment matters little in this action. ‘Competitiveness’ is only slightly less vague and assessment. All that really matters is that so only slightly more inspiring. Even ‘crisis’ is unemployment is important. According to the most insufficient to galvanize support if the threatened recent Eurobarometer Survey, unemployment is collapse is too far off or if the warning has been regarded as the most important issue across the EU as delivered too often. a whole – with 46 per cent of respondents pointing ‘Europe’ is at least potentially more effective as a directly to unemployment, 27 per cent identifying ‘the rallying cry for reform. During the early 1990s, the economic situation’ as a whole, and only 16 per cent government of underwrote a major market referring to terrorism.20 liberalization programme with the goal of The benefit that most Europeans expect from the participating in the internal market. The Belgian European Union is an improvement in their economic government made great strides in fiscal consolidation situation. Therefore, if support for European by focusing popular attention on the possibility that it integration is to increase substantially, economic might be left out of the single currency.16 And the new performance must improve and the European Union member states of Central and Eastern Europe all used must be seen to play a role in that improvement. the promise of EU membership to build support for the Indeed, that is why Europe’s heads of state and adoption of the acquis communautaire. government agreed to bring employment into the The ‘open method of coordination’ at the heart of Amsterdam Treaty to begin with. Running back along the Lisbon strategy works to generalize the mobilizing the causal chain, support facilitates reform, reform potential of ‘Europe’.17 This ‘open method’ relies on improves performance, performance increases support. the member states to set targets, to share best practice The challenge is how to start the cycle. Having made and to encourage each other through the process of the commitment to tackle Europe’s unemployment reform. The Commission plays only a supporting role: it problem, the European Union now needs to show represents the European interest without actually progress – or at least a credible demonstration that it having the authority to enforce member state has the means to succeed. The danger lies in the compliance. Within this framework, the member states prospect that developments may run in the opposite European Economic Governance: Forging an integrated agenda 5

direction. If Europe is perceived as failing in its commitment to address unemployment, then support 3. Transparency is credibility. for integration will decline, reform will slow and Insofar as the Lisbon Agenda encompasses the reform economic performance will deteriorate. of labour and product markets (what used to be called the ‘Cardiff Process’),21 it is relatively easy to sell a more modest definition of success. Such market Implications reforms closely resemble the activities leading to the completion of the internal market and so benefit from The Barroso Commission is in an unenviable situation. the Community’s long record of achievement. The Although the European Union has admitted to a clear situation becomes more complicated where the Lisbon responsibility to alleviate unemployment and improve Agenda touches on the process of welfare state the general economic situation, it has few clear-cut reform. Here what matters is less the reforms per se instruments through which to do so. Instead, the EU is than the fiscal implications that derive from them. The endowed with three overlapping policy agendas that, standard for success is set by the Stability and Growth taken together, might lead to failure rather than Pact and by the debt and deficit criteria that are success. Given this reading of the situation, the spelled out in the Maastricht Treaty. Here the question to ask is where to go from here. There are Commission must depend upon decisions taken in the four implications to this analysis. Council of Ministers: first, the Council of Ministers must reform the Stability and Growth Pact to bring it more 1. Retreat is not an option. into line with the pace of reform efforts; and, second, The European Union cannot abandon the Maastricht they must underscore that the fiscal objectives of Agenda without dismantling the single currency, and it reform efforts are to achieve macroeconomic stability cannot abandon the Lisbon Agenda without giving up that is conducive to growth. By implication, a revised on its commitment to help resolve Europe’s Stability and Growth Pact should stress realistic unemployment problem. Moreover – and whatever the programmes for structural reform while focusing progress made to date – the goals of achieving a stable attention on the long-term implications of large public macroeconomic environment conducive to growth and 22 of reforming the market structures of the member debts – including unfunded contingent liabilities. states to make them more sustainable and competitive Such a reformed pact would be more credible because remain valid. It would be extremely difficult to step it would be more transparent – both in terms of policy away from those objectives without leaving the expectations and in terms of how these relate to the impression that the European Union is either irrelevant wider economic agendas at work. or incompetent with respect to what most Europeans regard as the most important issues of the day – 4. Diversity is inevitable. growth and employment. In terms of perceptions, Market-structural reform is essential to European there is a great difference between failure and forfeit. economic success. Nevertheless, reform is easier in In this sense, the Barroso Commission’s decision to some countries than others. Reform is more pressing in place Lisbon at the centre of its five-year programme is some countries than others as well. Germany and an act of realism and not bravado (or hubris). France are obvious examples here, and so long as they continue to lag in revising their welfare state 2. Expectations must be managed. institutions, they are likely to continue to violate the There is no reason to abandon either the Maastricht or rules for fiscal consolidation as well. the Lisbon Agendas – and every reason to continue to A successful combination of Europe’s three pursue them. The European Union has made progress economic agendas must build explicitly on the diversity on both fronts. Interest rates and inflation are low of the challenges to be confronted. In part, at least, across the eurozone, exchange rate volatility no longer that is what the Lisbon strategy is designed to do. The disrupts intra-European trade, and the member states open method of coordination is ‘open’ because it have begun to implement welfare state and market- places the main responsibility for reform efforts on the structural reforms. Progress is slow – particularly on member states. To a large extent, however, the Lisbon the reform side – but it is also reinforcing. Therefore Agenda implies an unrealistic sense of uniformity. The the focus should be on ensuring that the progress headline goal of the Lisbon Agenda – to create the made translates into increasing political support. The world’s most competitive and dynamic knowledge- key is to manage popular expectations in line with based economy – nurtures the expectation that actual achievement. The European Union cannot by market-structural reform will progress at an even pace itself solve the problem of European unemployment. across the Union and that the member states will And action at the European level is unlikely to converge on common structures or similar transform Europe into the world’s most competitive performance. Such expectations are unrealistic. If knowledge-based economy. Nevertheless, the anything, the member states are more likely to retain European Union can focus attention on the institutional differences than to experience differences unemployment problem and it can coordinate member in performance (which we realize now are state efforts to reform. Barroso’s Commission is right to unavoidable). Even the goal of convergence on some narrow the focus of the Lisbon strategy in this regard. European standard is misleading. Certainly it is more The challenge is to explain to European electorates difficult to define what constitutes the world’s most that this is what constitutes success. competitive and dynamic knowledge-based economy 6 European Economic Governance: Forging an integrated agenda

than it is to explain what is meant by the achievement of macroeconomic stability for the eurozone (or the Conclusion EU) taken as a whole. The Barroso Commission has announced a policy Just as the ECB has had to admit to greater agenda that is sure to disappoint many and win over variation in economic performance across the member few, at least among the pundits. For its critics, Barroso’s states, the EU should also admit to variation in market- agenda is too encompassing, too unambitious, too structural design. The EU has one macroeconomic intergovernmental. But given the overlapping structure framework but it encompasses many different social of Europe’s economic agenda, it is probably about models. Any attempt to strengthen the competitive right. It sends an important message that Europe dynamics of the European economy must surely take matters. It explains what Europe should and what it this into account. Barroso’s social agenda helps move should not be expected to do. And it stresses the the debate into this direction by admitting that the importance of achieving successful market-structural whole range of economic actors have a role to play. If reform within the member states. The Commission such action helps to generate support, it will also help lacks the instruments to guarantee full employment, to generate success. fast growth, macroeconomic stability and popular support all on their own. Even so, the Commission needs to encourage progress where it can and manage expectations where it cannot. So long as Barroso is clear in his ambitions, the Commission does have a role to play. The member states, and the social partners, would do much better to support Barroso’s efforts than to seek to improve their position within them.

1 http://www.europa.eu.int/eur-lex/lex/LexUriServ/site/en/com/2005/com2005_0012en01.pdf. 2 http://www.europa.eu.int/growthandjobs/pdf/COM2005_024_en.pdf. 3 http://www.europa.eu.int/comm/employment_social/social_policy_agenda/spa_en.pdf. 4 http://212.3.246.117/1/BCFEOOGBICGIGFOCGJLIAAHAPDB19DBYGW9LI71KM/UNICE/docs/DLS/2005-00248-EN.pdf. 5 http://www.eiro.eurofound.eu.int/1998/10/feature/de9810278f.html. 6 The text of the Maastricht Treaty on European Union can be found at http://europa.eu.int/en/record/mt/top.html. 7 http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/00100-r1.en0.htm 8 The European Commission provides historical data for macroeconomic performance at http://europa.eu.int/comm/economy_finance/indicators/annual_macro_economic_database/ameco_en.htm. 9 http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/032a0006.htm. 10 http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/00300.htm. 11 http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/68827.pdf. The Laeken Declaration is published as an annex to the Presidency Conclusions. 12 Historical data for European attitudes toward membership is published by Eurobarometer in its standard reports: http://europa.eu.int/comm/public_opinion/standard_en.htm. 13 Data on voter turnout in European Parliamentary elections from 1979 to 1999 can be found at http://www.idea.int/publications/voter_turnout_weurope/upload/part%20III%20(78-93).pdf. 14 The transcripts of these press conferences are available at http://www.ecb.int/press/pressconf/2005/html/index.en.html. 15 This argument was first popularized by Mancur Olsen and has since become of mainstay of what Harvard political scientist Paul Pierson refers to as the new politics of the welfare state. 16 These country case studies can be found in Erik Jones, Jeffry Frieden, and Francisco Torres (eds), Joining Europe’s Monetary Club: The Challenges for Smaller Member States (New York: St Martin’s Press, 1998). 17 The ‘open method’ has become a major subject of academic analysis. For a good recent collection of essays on the subject, please see the Journal of European Public Policy, Vol. 11, No. 2, April 2004. 18 This argument is not obvious in the data but does emerge clearly in much of the academic analysis. One of the strongest proponents is Professor Matthew J. Gabel, University of Kentucky. 19 These data are from Standard Eurobarometer 61 (Spring 2004). See http://europa.eu.int/comm/public_opinion/archives/eb/eb61/eb61_en.htm. 20 These data are from Standard Eurobarometer 62 (Autumn 2004). See http://europa.eu.int/comm/public_opinion/archives/eb/eb62/eb62_en.htm. 21 The ‘Cardiff Process’ for the further liberalization of product and factor markets was initiated at the June 1998 European Council summit in Cardiff. See http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/54315.pdf. 22 This suggestion is consistent with the recently published IMF discussion paper on the Stability and Growth Pact (http://imf.org/external/pubs/ft/pdp/2005/pdp02.pdf). The question is whether it will be consistent with the actual reforms adopted at the European Council summit in March 2005. European Economic Governance: Forging an integrated agenda 7

Erik Jones is Resident Associate Professor of European Studies at the SAIS Bologna Centre, The Johns Hopkins University, Bologna, and an Associate Fellow of Chatham House.

Chatham House is an independent body which promotes the rigorous study of international questions and does not express opinions of its own. The opinions expressed in this publication are the responsibility of the author.

© The Royal Institute of International Affairs, 2005

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