European Economic Governance Forging an Integrated Agenda Erik Jones

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 Germany 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

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