Eurozone Watch

Sarkozy did not move on fiscal policy – but Germany starts debating a Eurozone summit. This week may, with hindsight, turn out as being a crucial episode in the development of EMU governance.

French President Sarkozy’s visit to the Eurogroup on Monday night was followed by calming remarks on all sides. Beforehand, many actors (such as the ECB through its Chief Economist Jürgen Stark, Jean-Claude Juncker as Eurogroup President, the German government through Peer Steinbrück, and others) confronted Sarkozy with harsh criticism of his fiscal policies, his ECB criticism, his voluntaristic approach to exchange rate policies, etc. (see our preview).
 
But afterwards, all parties involved in the meeting scaled down the tone. Some media reported that Sarkozy made concessions on his fiscal policy (for which I in fact don't see strong indications), the ECB dispute was not reinvigorated openly, and if there was a dispute on exchange rate policies, this was not transported into the public.
 
So is there indeed no problem with Sarkozy and economic governance after all?
 
There are problems, and they have surfaced ever since Sarkozy announced his visit to the Eurogroup and spelled out the points he would take to the meeting. But this week’s news are not bad, anyway. Precisely because they reveal the problems. And recognising them is the first step to solving them. So here they are:

The nervousness and harsh public reactions of some of the leaders showed us that there is (justified) doubt that the preventive arm of the Stability and Growth Pact, which is supposed to incentivate national policy makers to conduct fiscal policies which are sustainable in the long-term, does not work sufficiently well. Right now we see evidence that at least some member states (including France) are conducting pro-cyclical fiscal policies in boom times. So the fiscal regime in EMU, despite the hopes attached to the reform of the Stability and Growth Pact in 2005, should be rethought and reformed again. France showed us on Monday what the new political leadership thinks of the polical relevancy of previously made political agreements in the Eurogroup.

This debate on the fiscal regime of EMU should not only focus on the Pact and the Excessive Deficit Procedure, but include elements of cyclical stabilisation on the EMU level and the question of national fiscal rules.

Second, the determination with which Sarkozy pushes aside the commonly agreed objectives to implement his national “fiscal shock” (the economic sense of which is highly disputed) reveals: He does not seem to be clear himself what he means by better or closer economic governance. He has said on several occasions that he would want to strengthen economic policy coordination and called for a gouvernement économique. But his appearance in the Eurogroup actually weakened the Eurogroup, because it revealed the fragility of any consensual position the EMU Finance Ministers may take. Sarkozy showed how it can at any time be overruled by the Head of State and Government (and this has happened in the past).

Third, there is currently no common ground for a "Future of EMU"-debate in the 13 member countries. Sarkozy set the agenda, the others did not particularly like what he said – but did not engage themselves in giving directions to the discussion. The political debate is seriously running behind the discussions on economic developments in the Eurozone which are being conducted in academia but also in institutions such as the Commission, the OECD, and partly also the ECB. Just to pick one of the aspects, which we elaborated on at Eurozone Watch: the importance of cyclical divergences in the EMU and the economic and political consequences (see the contributions to our conference with RGE monitor and the press reports here) is ever more discussed and taken seriously. But have you ever attempted to discuss this issue with a national policy-maker? A lot of preparation is still needed to get this discussion going.
 
Meanwhile, and this is the fortunate outcome of Sarkozy’s appearance among the Finance Ministers, a growing number of people is arguing for a Eurozone summit, in other words: they ask the Heads of State and Government to finally get interested in Eurozone affairs. That is good news in a situation in which a top German official would still (jokingly, but revealing of the general opinion) say last week: “If Sarkozy invites us to a summit, this does not mean we will go there”.

But the case for a Eurozone summit is gaining ground. Italians have been interested in the issue for some time. Slowly, the mood even in Germany is changing. Last night, in Berlin, in a very good debate with 25 EU experts and policy makers, the Eurozone Summit suggestion (which I started advocating over a year ago and which until very recently did not get much attention) gained explicit support. Even a former Permanent Representative of Germany to the EU made a strong case for not leaving EMU issues only to the Finance Ministers. The press is also getting more and more interested in the issue (read this article on invitation of the Handelsblatt or Wolfgang Münchau's recent column in the FTD).

All this is partly related to Sarkozy’s visit to the Eurogroup. This is the good news of this week in the Eurozone: We can now start debating the agenda for the first meeting of the Eurozone Summit.

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