The Lisbon treaty and the risks of noncoordination of economic policies in the E.U.

Author:Grigore Silasi - Ion M. Anghel
Position:PhD in Law, University Professor - PhD in Law, University Professor; Ambassador (r)
Pages:9-18
SUMMARY

Article 5 of the Treaty on the Functioning of the European Union (T.F.E.U.) states: "1. Member States coordinate their economic policies within the Union. To this end, the Council adopts the measures, including the broad guidelines of these policies. Special provisions apply to Member States whose currency is the Euro. 2. The Union shall take measures to coordinate the employment policies of the Member States, in particular by defining the guidelines for those policies. 3. The Union may take initiatives to coordinate the social policies of the Member States.

 
CONTENT
The Lisbon Treaty and the risks of non-coordination of economic... 9
THE LISBON TREATY AND THE RISKS OF NON-
COORDINATION OF ECONOMIC POLICIES IN THE E.U.
Grigore SILASI*
Ion M. ANGHEL**
Abstract
Article 5 of the Treaty on the Functioning of the European Union (T.F.E.U.) states:
“1. Member States coordinate their economic policies within the Union. To this end,
the Council adopts the measures, including the broad guidelines of these policies. Special
provisions apply to Member States whose currency is the Euro.
2. The Union shall take measures to coordinate the employment policies of the
Member States, in particular by defining the guidelines for those policies.
3. The Union may take initiatives to coordinate the social policies of the Member
States.”
Keywords: The Lisbon Treaty, economic policies, Macroeconomic Policy
Coordination
1. Sources of Conflict in Macroeconomic Policy Coordination in the U.E.
and the Institutional and Legislative Solution Framework.
What is New about the Treaty of Lisbon?
Once in operation, the Economic and Monetary Union may experience
coordination difficulties between the different macroeconomic policy
instruments. A first problem of coordination can appear between the exchange rate
policy defined by the European Council and the monetary policy defined by the ECB. The
problem is real as the exchange rates set by the ECB are one of the key
determinants of the exchange rate movements of the European currency.
Therefore, monetary policy and exchange rate policy should be coordinated,
under the conditions in which the Maastricht Treaty has entrusted this
responsibility to different and independent authorities, without providing for the
organization of their cooperation.
Another coordination problem is that of the monetary policy decided by the ECB and
the budgetary policy which remains at the discretion of the Member States. In this area,
there are conflicts between monetary policy, subject to the objective of price
stability, and national budgets, established according to national priorities for
growth, investment and employment. There is the risk that this conflict will
* PhD in Law, University Professor.
** PhD in Law, University Professor; Ambassador (r).
Supplement of Law Review - Year 2019, pp. 9-18
10 GRIGORE SILASI, ION M. ANGHEL
degenerate into conflict between states, as the problems and priorities of each
other are not solved. Whatever the character of certain problems, better
coordination of fiscal and monetary policies is necessary. The need for
coordination becomes evident especially during shocks, such as the oil shock (a
"shock of supply"), which has generated, at the same time, inflation and recession
("stagflation") in most European EU Member States, and not in the EU as a
whole. In this situation, the optimal policy response could be to combine, on the
one hand, fiscal discipline and income policy to stop inflation, and on the other
hand to lower interest rates to support investments and production. But in a
monetary union where the Central Bank has only the obligation to follow price
stability, without having the right to negotiate the ideal combination of economic
policies with the political authorities, we could obtain a combination in the
opposite - an increase in interest rates in the short term - while deepening the
recession, something that allows governments to make no choice but a fiscal
stimulus.
The Treaty defines the structure in which the dialogue necessary to resolve
potential conflicts should take place. In keeping with the objective of price
stability, exchange rate policy will be defined in the context of close cooperation
between the monetary authority and other Community institutions, based on the
institutional framework built within the limits of the Treaty.
2. Coordination, Stability, Growth and Well-being. Space and Power.
At the Dublin meeting in 1996, the "Stability and Growth Pact" was adopted.
This pact brings a partial solution to the problems of the coordination of
budgetary policies. It is applicable only in a situation of temporary recession and
does not regulate the difficulties due to the deep and lasting economic
performance gap, which the Member States of the Union are facing. The Pact
restricts the possibility of allowing automatic stabilizers to play their counter-cyclical role
and there is the risk of imposing very stringent fiscal policies on countries in recession.
Apart from this, limiting the fiscal space of countries in difficulty may stimulate
the propensity towards fiscal and social dumping policies. It is considered that in
the framework of the Union, variable criteria can also be applied, taking into
account the economic situation. In a recession, the fiscal room for maneuver must
be wider, while in a recovery period it must be narrower, so that the budget
surpluses, which can be obtained during periods of economic growth, are used to
cover the debts contracted during periods of recession.
Even if the concept of stability is attached to the concept of growth, it does
not take into account the objectives of growth and full employment. The only
coordination of the fiscal policies advocated in the EU seems to be limited to a
defensive (or restrictive) logic. On the whole, we wanted to assure Germany that
it will not be obliged to share its currency with countries that cannot be capable
of the same monetary and budgetary discipline, as it does. It is well known that
The Lisbon Treaty and the risks of non-coordination of economic... 11
all the citizens of Europe cannot be mobilized without suggesting to them, in
perspective, the idea of eradicating poverty or even unemployment, even
without a pact of stability and growth, employment and social progress.
The coordination of all economic policies within the framework of the Union
requires, necessarily, to constitute a real political power at the European level, a
power of federal type; the space must be united with the power.
3. Fiscal Federalism and State Federalism.
The European Union - Economic Federation: Opportunity or Risk?
In the framework of the MU, the only instrument of economic policy left at
the disposal of the national state, to be used in the conditions of the emergence of
specific shocks, is the budgetary policy. At the same time, it must be emphasized
that, in this area too, complete freedom of the Member States is not possible. A
balance is imposed between the need for policies adapted to asymmetric shocks
and the need to avoid the negative externalities that the uncontrolled national
fiscal policies could impose on the whole of the Monetary Union. The T.E.U. does
not bring the necessary clarifications in this direction. The "fiscal stability pact" is,
however, a partial and incomplete solution, despite the major problems
generated in the intra-community relations plan. The sustainable solution that is
emerging is focused on financial solidarity in the context of a consolidated
European budget. The commitment on this path is linked to the completion of
political union, and therefore to the total institutional structure of federalist type.
Section 126 (3) of the T.E.U. defines the framework of a control procedure
and sanctions for public deficits considered excessive: the report of the
Commission, the Council, the vote of the Council, by qualified majority, on the
excessive nature or not of a deficit, the recommendations made to countries
whose deficits are considered excessive, the sanctions for these countries, which
delay too much the implementation of the Council's recommendations.
Still, the member states of the M.E.U. agree on the threshold susceptible to
sanctions, in the problems of the deviations of budgetary discipline. In 1995, the
German finance minister proposed an extremely restrictive "stability pact": a
sanction imposed automatically on any country that exceeds the 3% of GDP
threshold for fiscal deficits, and a 50% threshold for public debt. The sanction
consists in a fine of 0.25% of the GDP, for each point that exceeds the authorized
threshold. The fine is temporary, if the offending country resolves its problems
and quickly falls within tolerable limits, or can remain final, in case of persistence
of the level exceeded, compared to the accepted level. The proceeds of sanctions,
interest on deposits and fines will be reserved for the "virtuous" products of the
EURO zone, that is, countries without excessive deficits.
4. Financial Solidarity and the European Budget
The logic of financial solidarity had to oppose the defensive and repressive
logic of the Stability Pact. The mechanism of the M.E.U. does not prohibit public
12 GRIGORE SILASI, ION M. ANGHEL
deficits in the case of countries in difficulty. These difficulties are considered to
belong to the whole Union and do not represent just a national problem. For this
cause, the solutions must be in the interest of the Union, in the long term, and not
only for a certain country. The establishment of a real European financial
solidarity is necessary to avoid a financial conflict between the States of the
Union concerning the attraction of the capital, as well as to avoid the perilous
situations of financial bankruptcy of the States.
In practice, there are three main forms of financial solidarity:
1. Direct solidarity between States
States have financing capacities and / or better debt capacity, make transfers
or borrowings for governments facing financial difficulties. This solution is
recommended exceptionally and in the short term. In the long term, governments
cannot permanently subsidize their partners, without calling for the
implementation of economic policies that can quickly reduce financial
difficulties. Under these conditions, the deficit countries must agree to accept the
guidance of the directions of their policies by the performing countries. The
dissatisfaction created by this situation requires the intervention of the European
institutions and the implementation of negotiated policies.
2. The ECB's participation in the financing of the Member States
B.C.E. should not, in principle, ensure the monetary financing of fiscal
deficits. But, in the face of delicate situations, it must, technically, play the role of
the last lender. However, in this case it is only an emergency measure, not a
durable solution. In addition, loans granted by the B.C.E. governments are
accompanied by a commitment to follow precisely the policies defined by the
B.C.E. to reduce public deficits. The respective countries, having ceded their
monetary sovereignty to the B.C.E., will be forced to give it, in the future, their
budgetary sovereignty. These countries will in turn be able to ask for the transfer
of fiscal policy powers to the Union's political institutions, while keeping for
them just the opportunity to negotiate these policies.
3. Financial solidarity through the European budget
At present the Community budget is extremely small, ie only 1.27% of
European GDP. For the current budget to play its role at European level, as far as
economic stabilization and social solidarity is concerned, as in the case of the
national budget, it needs to be more developed and considerably expanded. The
economic and social interventions necessary to support the regions in difficulty
within the framework of the Union are gradually entrusted to the European
institutions. In comparison with the first two ways of financial solidarity, the
latter is the only (and most concrete) way to achieve in the long term. All these
channels of financial solidarity evoked imply a greater and greater transfer of
decision-making power to (supranational) (community) institutions. As with
The Lisbon Treaty and the risks of non-coordination of economic... 13
monetary policy, countries are gradually losing their autonomy also in fiscal
policy. The countries that are affected first, because of their financial difficulties,
are the ones calling for the development of a real European fiscal policy. The
increase in the European budget - as a volume and importance - for economic
policy determines the gradual shift of a substantial part of the real economic
power, from national parliaments and governments to the European Parliament
and the governmental bodies at European level, which should be created. This
transfer of powers will introduce an imbalance between the political power,
which remains in the hands of the national governments, and the economic
power, more and more limited. European economy and national political power:
in time, this situation will evolve towards a consolidation of the political power
of the European institutions, that is to say, more concretely, towards a form of
federalism on the political level. And so, as always in history, a single currency
leads to a single political power, to a federal power extended to the continent,
that is to say The United States of Europe (USE). The efficient functioning of the
European Economic Union necessarily requires, on the basis of the Single
Market, a unification or at least coordination of the main aspects of economic
policy and necessarily of monetary policy and fiscal policy.
5. A Minimalist Budget Federalism in the current E.U.. The Danger for the
EURO1
The European Union is profoundly atypical in relation to existing
federations. Economic integration has been achieved by maintaining a very small
central fiscal authority, with a very limited role in redistribution and non-existent
in the allocation and stabilization function.
The theory of fiscal federalism justifies the role of each field of intervention
(defence, education, transport, social security, etc.), the level of the most effective
responsible authorities.
Federalism allows very different combinations in decision-making at the
level of central authorities and local authorities. The most efficient allocation of
resources is based on a principle of simple allocation: "the most decentralized
level of governance capable of internalizing all economic externalities" is
favoured, which makes us pay attention to the principle of subsidiarity. This is a
valid principle under normal conditions. The minimum or almost no level of
fiscal federalism (taxes, social contributions, public spending, social transfers or
federal spending) does not allow the EMU to correct specific shocks in certain
regions and countries.
Functions are assigned to the lowest echelon except for the case where the
externalities involved justify the higher-level exercise.
1 Is the Euro condemned?
14 GRIGORE SILASI, ION M. ANGHEL
6. The Budget Restructuring of the E.U. towards the Financing of Non-
goods Collective Products
With the enlargement of the E.U. and the need to achieve the "Lisbon
Strategy", appears the need for profound reform of the Community budget. This
is necessary not only to try to at least partially absorb asymmetric shocks in the
M.U. (this is the aspect that is normally addressed), but also to rationalize the
public expenditure of the Member States, whose national budgets can no longer
assume the cost of efficient production in the whole of non-goods collective
products, to a satisfactory level and quality. The aging of the population, the
increasingly qualified research and the increasingly qualified workforce, the
technical progress and the increase of the socio-sanitary and training costs, the
expenses of formation, health and education are so great that states can no longer
cover them individually. A federal budget should, in the future, deal with the
problem of non-goods collective products in Europe and be less likely to absorb
the asymmetrical shocks resulting from the new EU structure, taking into
account that for the European citizen this thing means almost nothing, in
exchange it means a lot of non-goods collective products, education, health,
economy and society based on knowledge, the project of the future.
What resources does the European Union have for which policies? This is the
essential demand for the future of European construction. If the institutional and
decision-making system of the Union is obviously no longer adapted in a Europe
of 27, tomorrow 36, it is equally clear that the financial resources of the European
Union are very modest in view of the progressive increase of its skills and the
number of its members. The lack of budgetary intervention resources at the level
of the Eurozone risks limiting (or compromising) the global intervention to
guarantee a real impact in the context of a major economic and financial crisis.
7. Economic and Social Shocks and Economic Policy Responses in an
Economic Union of E.U. Type.
An integrated structure works if there is homogeneity of structure. Non-
homogeneous structures experience a series of asymmetrical shocks.
Economic shocks have various origins: natural disasters, wars, migrations,
social-political crises, financial or sectoral crises, especially energy crises,
technological changes, changes in currency exchange rates, and so on. These
shocks are at the origin of multiple disturbances before which the economies
must be stabilized. As in nature, a shock wave is reflected on a more or less
extensive surface, the economic shocks can affect, with the same intensity, the
whole Union (or the Euro zone), speaking in this case of symmetrical shocks .
When shocks affect only a few countries, some sectors, or some regions of the
Union, we speak of an asymmetrical shock. Since this is the case of a market
economy, shocks have an impact on demand or supply. Shocks of demand act on
one or more components of aggregate demand, while shocks of supply affect the
The Lisbon Treaty and the risks of non-coordination of economic... 15
production costs of different firms and change their profitability in the long term,
being considered, for this reason, permanent shocks. While the use of public
expenditure is effective in the event of shocks in demand, it is no longer effective
in case of supply shocks, because it contributes to price appreciation and reduces
internal and external cost competitiveness. Only a change in relative prices
would allow the economy (in the country) to adjust.
Economic policy responses must be different, taking into account the type of
shock suffered, and policies can be efficient or not, depending on their degree of
Europeanization. The common monetary policy is a priori adapted to deal with
symmetrical shocks, together with the coordination of national budgetary
policies, in case of demand shock; but it cannot be used in case of asymmetrical
shock, because it must take into account the interests of the whole of the E.U. and
not the interests of a Member Country, big or small. The problem will be
particularly difficult in case of energy shock, taking into account differences in
the structure of the energy balance of the Member Countries. National fiscal
policy, on the other hand, is more favorable to the absorption of a specific shock,
as soon as it has an effect on demand. Eventually, the application of fiscal policy
may be accompanied by an increase in the coordination of other national fiscal
policies. Loss of income, following a specific shock in one area of the E.U., can be
offset by an increase in the budget revenues of other countries. The number of
countries affected is directly proportional to their size. It is possible that a large
country (such as Germany) compensates for the losses of 3-4 smaller countries.
The symmetry or asymmetry of the shocks depends on the symmetry or
asymmetry of the economic structures of the E.U. countries, which shows the
great importance of the convergence, not only of the Maastricht (nominal) type,
but especially the real convergence. The most difficult shocks, which pose the
greatest problems, are the asymmetrical shocks of supply, because, taking into
account the criteria proposed by Mundell for an optimal zone, they require the
use of market mechanisms (flexibility of prices and wages, labour mobility),
which require delicate structural reforms to be applied.
8. The Rules of the Optimal Combination of Economic Policy Instruments
Practice shows us that economic policy objectives can be contradictory. The
contradictory nature of these objectives implies that one and the same instrument
cannot be used to achieve completely opposite objectives, that is to say in an
expansionist and restrictive sense. In 1952, Tinbergen formulated the rule
according to which, for the success of an economic policy, one will use as many
instruments as objectives. Faced with the dilemma of applying one or more
different instruments to each objective, another rule has emerged, Mundell's
(1960) rule, in which an instrument will be used for the purpose for which it has
greater relative efficiency, that is, the rule of comparative efficiency.
16 GRIGORE SILASI, ION M. ANGHEL
Mundell's rule must be approached in a fixed exchange rate regime and a
floating exchange rate regime.
In a fixed exchange rate regime (the international monetary system between
1945 and 1973), monetary policy becomes less efficient than fiscal policy,
especially with regard to growth and employment objectives. On the other hand,
it becomes more efficient in the problem of external equilibrium. From this
judgment, Mundell proposes an optimal allocation of tasks for an economy in
fixed exchange rate regime, where the capital is mobile - that the monetary policy
is intended to ensure the external balance, while the budgetary policy is intended
to ensure internal balance. Budget relaxation or fiscal austerity will be used,
taking into account the state of the economy - unemployment or inflation. At the
same time, an increase or decrease in the interest rate will produce the capital
movements necessary to absorb a balance of payments deficit or surplus.
According to the situation in an economy, the following combinations can
appear:
1. Inflation and external surplus: a restrictive fiscal policy is needed to
combat inflation and an expansionary monetary policy (lowering interest rates)
to drive out capital and eliminate surplus;
2. Inflation and the external deficit: a restrictive fiscal policy is needed to
fight inflation and a restrictive monetary policy (interest rate hike) to attract
capital and reduce the deficit;
3. Unemployment and the external surplus: an expansionary fiscal policy is
needed to combat unemployment and an expansionary monetary policy to
stimulate the outflow of capital and the elimination of the surplus;
4. Unemployment and the external deficit: an expansionary fiscal policy is
needed to combat unemployment and a restrictive monetary policy to attract
capital and reduce the deficit.
The Maastricht Treaty specifies the statutory obligation of the ECB to
maintain price stability.
9. Regional Policy and Cohesion in the E.U. Regional Policy and the New
Dimension of the E.U. Real and Nominal Convergence
The unification and homogenisation of the European area are clearly defined
objectives of Community construction. Political, legal, financial or fiscal measures
have been put in place to achieve such goals.
The concept of regional policy defines at E.U. level the set of structural
policies, aimed at promoting the reduction and elimination of disparities
between different regions of the Member States, with the aim of ensuring a
harmonious development of the whole community area.
The concept of economic and social cohesion derives from the concept of real
convergence, in the sense that the goal of nominal convergence cannot be
achieved if the supply conditions of economies are too divergent. In other words,
The Lisbon Treaty and the risks of non-coordination of economic... 17
the transition to the notion of convergence necessarily implied the concept of
cohesion.
The Single European Act of 1986 replaced the concept of convergence with
the concept of economic and social cohesion, which is broader and aims to
approach the standard of living of all E.U. countries and regions.
10. The Financial Instruments of Cohesion
In order to meet the objectives of reducing the "gap between the levels of
development of the various regions" and reducing "the lag in the development of
the less favored regions" (Article 158 EU [Article 130A]), the Union has, in
addition to funds with a structural purpose, which operate in accordance with
the Commission's specific common intervention principles, in the form specified
in the Single European Act.
The Treaty of the E.U. has made the issue of cohesion one of the three
Community initiatives programs. The mission of these funds was reformulated
in 1988, starting from the new title devoted to economic and social cohesion, as it
appears in the Single Act, of the Union's priorities alongside the Single Market
and the Economic and Monetary Union, and the cohesion fund was created to
promote the convergence imposed by the single currency to countries lagging
behind in economic development.
Conclusions
The budget is the subject of close and contradictory negotiations between
E.U. countries, taking into account the national nature of the financing, which is
conducted according to well-established rules. In 1988, after several years of
annual negotiations, the E.U. adopted a 5-7 year "financial perspective". The
European Commission makes the budget proposal, and the "Budget Authority" -
the Council of Ministers and the European Parliament - negotiates the agreement.
Subsequently, fiscal policy is the subject of strategic negotiations, assessing costs
and benefits at national level, CAP reform, regional imbalances, and
enlargement. The problems of fraud in the implementation of the budget led to
the creation of the Court of Auditors in 1975, the "Wise Men" report of the
European Parliament and the resignation of the Commission in March 1999. The
appearance of the "club of net contributors "(Germany, Great Britain, the
Netherlands and the Nordic countries) meant that the Berlin package limited the
ceiling on anticipated spending to 1.13% of European GDP until 2006. In 1975,
Structural Funds accounted for less than 5% of EU expenditure. The commitment
to promote "economic and social cohesion", taken in 1985, determined an increase
of these expenses to one third of the budget. This means that new opportunities
have emerged for a partnership between local or regional authorities and the
European Commission through a form of multi-level governance. In any case,
successive reforms of the funds have led to the control of regional policy by
18 GRIGORE SILASI, ION M. ANGHEL
national governments. Moreover, the allocation of funds between countries and
for the various programs has been the subject of very close negotiations at a high
level between these governments, the Commission having the difficult task of
guiding the development of this policy. At the same time, new concerns are
influencing the political context. EMU discourages increased public spending,
while new member states have high funding demands from the E.U.
The EU budget barely exceeds 1% of E.U. GDP and does not have a counter-
cyclical component, 80% of which is devoted to the structural funds, which are
used specifically to 'buy the will' of countries to join the Union. On the other
hand, in the United States, the level of federal taxes (66% of all taxes)
approaching 20% of GDP, makes it possible to correct the specific shocks of the
different regions by modulating public transfers.
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