Economic governance and differentiation: only for the Eurozone or all-EU members By Rosen Dimov

Abstract This piece of writing explores the intergovernmental and Community segments of European governance modes, describing the advantages and potential risks for differrentiation across the eurogroup and the wider EU. It also outlines the democratic foundations under which the Economic and Monetary Union shall be developing. Introduction The economic component has been at the heart of common Europe, ever since the Coal and Steal Community Treaty. While the emerging market has been a (if not the) driver for other policies of integration to emerge, upon recently the debate over the ongoing recession has reiterated the topic of economic governance at the centre of public attention. The continuous financial crisis that has violently hit Europe along with other corners of the world has placed a threat to the direction of the European Union, putting suspicion to the grounds of the euroarea and more broadly to the whole joint project of 27 countries. Against this background, the impacts of the mode of economic governance employed and applied is reassessed so that the reasons for differentiation in the EU and the eurozone are uncovered and analysed. Tools, strategies in use? The EU is not proud to be successfully overcoming the debt crisis: yet, it has developed a rich instrumentarium to mitigate the current recession. While strategic documents such as Europe 2020, or the Stability and Growth Pact (to name a few key ones among many more) have been drafted carefully over time, the pending obstacles entailed by the crisis appeal for urgent steps. A possible cliched explanation for the non-use of such tools is that most plans remain still on paper, while concrete and immediate reaction needs the common understanding and coordinated reaction with regards to the shared problems in the EU and the eurozone. Building a single picture of the situation at stake, as an initial stage in a successful counter-crisis scenario, goes through reaching a consensus. While compromise among strictly specialised experts (ie economists in this case) is easy to reach, the political game is a complicated one. Even before concrete steps are taken to eradicate the recession, there is lack of uniformity in the opinions because of a dangerous wildlife battle over power. At the problem-identification phase of the European governance mode applied against the crisis small EU countries wait for the positions of the powerful, big states and then align with a more favourable constellation. France and Germany, underlying partners in the stability of the eurogroup, have vocalised a (after a while, a common) proposal for a new direction for the regime, encompassed in the so-called Euro Plus Pact. Under the Berlin consensus eurogroup aspirants and current members of the eurozoe shall adopt and enforce measures of strict financial discipline. The prescribe recipe includes golden rules, which dig deeply into the national domain of an EU country. The conditionality either follow this criteria or leave the eurogroup has a dramatic impact to the domestic affairs of any European state, forcing it to change the utmost blueprint of sovereignty, the national constitution. An amendment, under the design by the French-German duo, shall introduce constitutionally a restraint to the debt size,

which has already been done by the pioneers Germany and France, followed by Spain, Poland, Hungary and soon others to come. A massive adoption of these Schuldenbremsen (literally debt breaks) all across the EU but primarily the eurozone would demonstrate to outer actors (especially investors and financial institutions outside of Europe) an irrevocable commitment to a whole set of self-control mechanisms thereby drastically and rapidly increasing the credibility of the euro and the whole European market (Annunziata, 3). In result, this will cause a huge economic impact, bringing fresh capitals back to Europe. The sheer gaps will be filled with the funds that are missing and a better macroeconomic future is anticipated. Yet, this extreme fiscal discipline is subjected to criticism, too. The major concern derives from the simple economic estimation that the effect of suchlike governance innovations take years to unfold. In addition, the rigorous compliance with budgetary requirements is not a universal formula and will not lead to the same outputs everywhere. While there are still inequalities in the eurogroup and even more shocking disparities in the whole European Union, a wide range of tools shall be employed together so that consequences are perceptible all across. Supplementing fiscal austerity with other measures will eventually build a culture of stability (Gerken et al., 16) that would make the mode of European governance applicable as an automated reflex intrinsic to the eurozone members and eurogroup applicants. Contradictions in a uniform governance model Another approach to the common economic governance denotes that the euro per se does not trigger a huge impetus to, what is more important than monetary issues, in-depth structural reforms (Caesar et al., 15). The European Commission being a supranational institution demands further integration of economic policies, so that market turbulences are contained in flexible measures and imbalances are rectified (Speech, Oli Rehn). Paradoxically, the Community method has wishes that differ significantly from the intergovernmental manner thereto, upon the past months the igniting conflicts at leadership level between the political heads of the Commission and eurozone reformist Germany. The transnational component of the Economic governance rests on fostering in-depth corrections, which have to take place within eurogroup-advocated tight budgets. By its very essence, this contradiction will not leverage differences in Europe (EU as well as eurzone) just the opposite. With substantially reduced room for manoeuvring due to a constrained fiscal framework, a member state will bear less policy latitude in which they have to reform economic sectors or support the under-developed regions and citizens. This inherent controversy will aggravate disparities, making, in simple terms, the poorer (entities or persons) less economically well. The ongoing gaps on a countrybasis will worsen on the geographic axis North-South of Europe, as well as between individuals. Therefore, this approach is incomplete and inefficient if applied solely across the EU. To complement the set of tools in a common European governance mode, an integrated development is necessitated which is dedicated to, among others, advancing growth, introducing innovation and hi-tech components of the single market, job creation, productivity boosts, strategic project funds, etc. The implementation of such measures shall be done in profound coordination among national and Community stakeholders, in accordance with the domestic Stability and Convergence Programmes, early warning mechanisms to avoid unmanageable bursts of deficit burden and other unexpected dangers. While these might already be existent in the Stability and Growth Pact, their execution requires an increased cooperation among the European Parliament (providing democratic credibility over the national budgets control) and the Council, preferably acting more often in co-decision, in detailed consultation

with each and every national parliament in the European Union. Reaching a univocal coherence inside the extendible eurogroup and the European Union will consequently constitute a more consolidated representation of the common interests at the global stage: at the platforms of the G7, OECD, IMF, WTO, etc. In return, there will be huge dividends due to the persuasion of foreign investors and international forces. A flow of capital targeted to the EU would strengthen the inner economic capacities and rectify intra-eurogroup and inra-EU imbalances. However, the coherent development under a common governance pattern demands the imposition of sanctions to those that are deviating from the rules. States in violation shall be confronted with sanctions no matter what their influence is. The previous attitude of the Community institutions towards underperforming countries does not extinguish the fears, especiallyin smaller countries, that double standards are applied. Realpolitik examples are not encouraging: the non-compliance of Germany and France (paradoxically, now the advocates for fiscal scrutiny) with the 3% restraint to deficits did not lead to them being punished in 2003, as far as systematic underreporting of Greece's fiscal health since 2001 was not sanctioned either( Kopf, 9). Hypocricy is there outside the eurogroup, too. The UK which has opted out of the common currency has recently been a major opponent of the proposed novel instruments of reform in the EU economic governance, although, in the estimation of Eurogroup's President, the British budget defcit is twice as high as the eurozone average (EUObserver article). At the same time, improvements in the set of roles for self-control in the eurozone will have a major positive impact on the non-eurogroup members, whose economies are much related to those of the eurozone countries. The ultimate direction for the eurozone and the European Union in its entirety goes through governance solution that can be symbolically entitled by myself economics +. What needs to be added to the current regime so that the eurogoup survives is not to hear ultimatums that a member country will (have to or voluntarily) exit the club of 17, but embedding the Economic and Monetary Union into the fabrics of a political union (Baldwin et al., 31). Decisions taken in urgency by governments that are far-off from citizens and coordinated with eurobureaucrats that are even less accountable to the citizenry. The eurozone shall increase its legitimacy, the decisions thereto being under the control of the European people, through the domestic paths (national parliament, referenda), or the Community paths (European Parliament, European Citizens Initiatives) or any other means of channeling the democratic voice of Europeans. This setup of the eurogroup will co-exist with the institutional infrastructure of the wider European Union, sometimes overlapping peacefully with it, in other cases being in contrast to it: yet, we cannot sacrifice democracy for the sake of an economically converging Europe. SOURCES USED: (in order of reference) Stability and Growth Pact, Europe 2020, Euro Plus Pact accessible at www.eurlex.com Annunziata, Marco Moral hazard in the eurozone: a proposed solution in Economic Special of UniCredit Bank, accessible at www.hypovereinsbank.de/media/pdf/100517_Moral_hazard_in_Eurozone.pdf Gerken, Luden, et. al. Anforderungen an die Sanierung der Euro-Staaten Schuldenbremse plus Nebenbedingungen, accessble at Caesar, Rolf, et al. Governing the Eurozone Looking ahead after the first decade, accessible at http://www.swpberlin.org/fileadmin/contents/products/projekt_papiere/SVGoverning_KS_101209.pdf

Speech, Oli Rehn (22 September 2011) - accessible at http://europa.eu/rapid/pressReleasesAction.do? reference=SPEECH/11/600&format=HTML&aged=0&language=EN&guiLanguage=en Kopf, Christian Restoring financial stability in the euro area, in CEPS Policy Brief no 237 accessible at www.ceps.eu/ceps/download/4292 EUObserver article (18.11.2011) accessible at http://www.euronews.net/2011/11/18/junckerlashes-out-at-uk-over-euro-advice/ Baldwin, Richard, et al Completing the Eurozone RescueWhat More Needs to be Done?, accessible at www.voxeu.org/reports/EZ_Rescue.pdf