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Report on economic governance in the EU

29/04/2016

 

The Spanish ESC analyses the economic situation in the EU, and problems of institutional confidence

•  The EU should take a less restrictive approach in fiscal policy, albeit without questioning the need for fiscal consolidation, so as to substantially boost public investment. The Council also considers that greater flexibility should be allowed in complying with the consolidation roadmap.

•  The European Fund for Strategic Investments, fleshing out the Juncker revival plan, appears unsuitable for giving fiscal impetus to the regions where the crisis is most severe and which have less budgetary margin for backing investment projects.

•  The Council believes it would be reasonable to strengthen the EU budget and to establish mechanisms for mutualising public debt, but no progress has been made in this field.

•  Regarding national competitiveness boards, which are to have a mandate to assess whether wages are evolving in line with productivity, the Council expresses concern that this power may clash with the model on which wages are determined in the Spanish institutional framework.

•  The Council sees a need for greater coordination and convergence in the field of economic and social policy in order to reduce the great disparities in competitiveness and social cohesion.

•  The EU’s new economic governance has had the effect of reducing the role of trade unions and employers’ organisations at European level in the decision-making process.

•  Community governance has proved deficient in taking decisions in a joint and operative way in response to the challenges arising. The EU faces three crises: Community governance, asylum and refuge, questioning Europe’s traditional values and culture of hospitality and even the principle of free movement, and a neighbourhood crisis, demonstrating the weakness of European foreign policy. Europe continues to work on an intergovernmental logic that has generated a loss of legitimacy in EU institutions, resulting in disaffection in the general public.

•  An EU political and institutional political architecture is needed to ensure that the transfer of national sovereignty to the Union is accompanied by greater democratic legitimacy and accountability of EU institutions.

 

The Spanish Economic and Social Council approved its own-initiative report analysing economic governance in the European Union by a large majority with 40 votes in favour, 1 abstention and no votes against.

The Spanish ESC approved its own-initiative report analysing economic governance in the European Union by a large majority

This report is the Council’s third on the subject in recent years. The first was Report 2/2012 on new economic governance in the EU and growth, the second, Report 1/2014 on developments in economic governance in the European Union, and this third report is intended chiefly to review the actions taken over this period in order to assess the degree of progress in managing the crisis and in redesigning economic governance in the EMU, highlighting the challenges that remain.

The report analyses the economic situation in the EU and discerns a general recovery, though with divergences across the various States. The employment rate has been falling but it is still two and a half percentage points higher than at the start of the crisis.

The increase in activity has been supported by easing on the financial markets, an expansive monetary policy, relaxing of the fiscal consolidation process, a fall in oil prices and the depreciation of the euro. But other factors may undermine the economic upturn: a slowdown in the growth of emerging economies, less favourable prospects for raw-material exports, the raising of interest rates by the US Federal Reserve, the slowdown in world trade, international geopolitical tensions adding to uncertainty or difficulties in getting European inflation onto the desired track.

The Council judges that there is very little room for manoeuvre in monetary policy for engineering a recovery in growth, which would require additional actions with fiscal policy measures. The contractionary fiscal policies adopted since 2010 are hampering recovery, with a generalised fall in public investment. The EU should move towards a less restrictive approach in its fiscal policy, albeit without questioning the need for fiscal consolidation, so as to substantially boost public investment. The Council also considers that greater flexibility should be allowed in complying with the consolidation roadmap for the States still in the corrective arm of the Stability and Growth Pact.

The European Fund for Strategic Investments (EFSI), though a positive tool, has arrived late and is insufficient. Developing strategic investment will depend on mobilising private capital, with social and environmental considerations and territorial cohesion taking a back seat. The Council points to the risk that this initiative will chiefly benefit big companies with most funding capacity and that it will concentrate investments in the more developed EU countries with stronger public sectors, not helping with the necessary structural convergence. The EFSI, fleshing out the Juncker revival plan, appears unsuitable for giving fiscal impetus to the regions where the crisis is most severe and which have less budgetary margin for backing investment projects. Moreover the fund’s life of just three years gives rise to concern about the lack of tools with a longer timeframe for automatically addressing future crises of demand and investment.

Regarding new developments towards banking union, the report highlights rules on capital requirements, restructuring and recapitalisation of banks and deposit guarantee schemes, though the process is still incomplete.

The Single Supervisory Mechanism has limited scope, and though the Single Resolution Mechanism has become operational and the Single Resolution Fund has now started up, a bridge mechanism is still needed until the Fund reaches its full size in 2023. Also lacking is a public backing mechanism at European level, i.e. a fiscal backstop, to provide for any situation of acute need once the Fund has been fully financed, and the mechanisms available are insufficient.

Regarding capital market union, the Council considers that, though at an early stage, it represents a significant change for the European financial system, traditionally dependent on bank financing but now seeking to increase the share of alternative sources of finance.

As to combating cross-border tax avoidance, rapid and substantial progress has been made in administrative cooperation, extending the scope of automatic information exchanges.

In tax harmonisation, no substantive steps have been taken towards establishing a consolidated common tax base in the EU for corporate tax, or for establishing a tax on European financial transactions.

Regarding the integrated budgetary framework, the Council believes it would be reasonable to strengthen the EU budget and to establish mechanisms for mutualising public debt, promoting macroeconomic stabilisation and structural convergence in the euro area. But no progress has been made in this field, and moreover the project has been put off indefinitely.

As to national competitiveness boards, which are to have a mandate to assess whether wages are evolving in line with productivity and to influence wage-setting processes, the Council expresses a strong concern that this power may clash with the model on which wages are determined in the Spanish institutional framework. The Council believes it would be advisable for the factors influencing competitiveness to be addressed in the context of European social dialogue.

The Council sees a need for greater coordination and convergence in the field of economic and social policy in order to reduce the great disparities in competitiveness and social cohesion within the euro area. Economic and social policy requires greater coordination and should be geared to developing the single market and to preserving the European social model. Though the new macroeconomic imbalance procedure gives more attention to social aspects and employment, these remain subordinated to economic and financial developments, resulting in lopsided progress in the sphere of governance.

In the context of the latest crisis, the European Union has lacked an integrated strategy in economic and social terms, as well as adequate governance mechanisms. The Commission has taken positive steps in the field of policy as well as in providing instruments for its implementation, although they remain insufficient.

The new economic governance has had the effect of reducing the role of trade unions and employers’ organisations at European level in the decision-making process. This was acknowledged by the European Commission in its communication “On steps towards Completing Economic and Monetary Union”. It is also worth noting that the “Five Presidents’ Report” proposes that the various governments should consult the social partners more systematically before drawing up structural reform agendas.

The weaknesses in institutional architecture have persisted. The deficiency of Community governance is the difficulty that Member States have in taking fast, joint and operative decisions to tackle the challenges that arise. The EU faces three crises: that of Community governance, especially as regards the euro; a crisis of asylum and refuge, as the issue has not been addressed jointly and effectively and moreover it has questioned Europe’s traditional values and culture of hospitality and even the principle of free movement; and a neighbourhood crisis, ranging from Ukraine to Syria and showing the weakness of European foreign policy. Europe continues to work on an intergovernmental logic that has generated a loss of legitimacy in EU institutions and a democratic deficit, resulting in a disaffection towards Europe among the general public. Also the EU as a region has lost influence on the international scene.

Regarding the clarifying of decision processes and the enhancement of the European Parliament’s decision-making powers, no results have been achieved, as the changes required have not been made to the Treaties. Nor has there been any success in strengthening the role of national parliaments.

The Council approves the Commission’s greater transparency with the publishing of information on meetings held by Commissioners and the EU transparency register. This latter point may help the European public to recover some pro-European feeling.

We may conclude that we still have a long way to go in configuring a political and institutional EU architecture liable to ensure that the transfer of sovereignty by Member States to the Union in the main economic and financial spheres is accompanied by greater democratic legitimacy and accountability on the part of EU institutions.