FSE/ESF Forum social européen/European Social Forum - Europact and economic governance in the EU- A Crash Course
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// Europe on the move // Analysis/ statements for a better world

Europact and economic governance in the EU- A Crash Course [en]
19 April 2011

by Kenneth Haar, Corporate Europe Observatory, March 2011


This years biggest and most far reaching reforms of EU legislation are by far the ones on economic governance. At the moment the pact on competitiveness, or the europact as some call it, is the most prominent in the debate. And for a reason. The europact contains a number of benchmarks on economic policy making in member states that have outraged trade unions and have created strong debate in many countries. In the pact the eurozone and other member states who have decided to join, vow to keep wages low, implement reforms on pensions, and to keep social expenditure at a “sustainable” level. In itself major steps, but it’s not until the europact is understood in connection with the other proposals on economic governance, that the scale of the problem is clear.

The following is intended to give an overview – a crash course in future economic governance of the European Union, if you like. I’ll end up with a description of the europact and an assessment of how the pact fits in with the other proposals on economic governance. That question, I would argue, frames the drama of the EU summit on the 24-25th of March.


The first reform has already been adopted. Under the so called “European semester”, member states are to hand in the draft state budgets for the coming year. After the Commission has scrutinised the documents, it will draft comments for the Council to consider. In July, the Council then gives “policy guidance” to all member states.

The Commission gives its advice on the basis of its Annual Growth Survey. This years edition emphasises the need for pension reforms in member states. So it seems some major issues are at stake here. The question is to what extent this will influence decision making at the national level. It is quite groundbreaking in itself that the Commission and the Council will discuss state budgets in most cases well before a final draft is presented to national parliaments. A Danish professor has argued that the package of reforms of economic governance as a whole will have the same influence on “fiscal policy” as the nuclear bomb had on security policy. His argument is not that strong measures will force member states to comply, but rather that most governments will strive to comply with EU standards on budgets to avoid sanctions in the first place.

The European semester is the building block in the middle of all the reforms. It provides a spelt out procedure to deal with the other elements of economic governance. Taken alone, the semester doesn’t include sanctions. But several other building blocks do.


In September last year, the Commission published six pieces of draft legislation - sometimes referred to as "the sixpack". All have been approved with only minor proposals for amendments by the Council. According to the plan, they are to be voted on in the European Parliament in April, and the final decision to be taken in June.

Four of the proposals concern the Stability Pact. Under discussion is mainly how to enforce the two key thresholds of the Stability Pact; that member states are obliged to keep deficits on state budgets below 3 per cent, and to keep debt below 60 per cent. According to the original rules, members of the eurozone are to be fined if they cross these two thresholds, but in practice the rules on sanctions have not been upheld. That is about to change in various ways:

* In order for a fine to be prevented by the Council, there has to be a qualified majority against the imposition of a sanction.

* Member states are obliged to have “rules” in place eg. in national legislation, on “numerical fiscal rules that effectively promote compliance with their respective obligations” such as “compliance with the reference values on deficit and debt”.

* A new measure is introduced to ensure that debt is paid off at a certain speed. The standard is to be 5 percent of the debt each year. For countries with a high debt, this can be very serious and could have serious consequences for state budgets.

* Member states outside the eurozone who cannot be fined under the treaty will also be subject to sanctions. This will not be in the form of a fine – that would contradict the Treaty. In stead deductions will be made in different kinds of support the member states receive from the EU, eg. agricultural support. A given member state will then have to support eg. farmers directly with its own funds. Not a fine, but a fine it is.


On top of the reforms of the Stability Pact, the two remaining proposals in "the sixpack" puts forward a set of separate rules on economic policy – proposals on so called “macroeconomic imbalances”. It’s not carved out what kind of imbalances the proposals are to be dealt with under the proposal, but it is hinted that they can include price competitiveness, speculative bubbles, current account deficits and more. The significant about the proposal is that it can pave the way for intrusions deeply into priorities on the state budget, labour law and - indeed- it could have influence on collective bargaining.

How would that work? A detailed description can be found in my article "Corporate EUtopia": http://www.corporateeurope.org/lobb...

In this place, I’ll be brief and basic: To make sure that member states economies do not build up an imbalance, indicators are chosen and thresholds defined. If the threshold is crossed by a member state, and if the government of the member state does not react quickly enough in the eyes of the Council and the Commission, it can be subjected to a procedure called ’the excessive imbalance procedure’ under which it can be fined if it’s a country in the eurozone, or received a sharp criticism if it’s not.

The qualitatively new about this procedure is the fact that it allows the EU - the Council and the Commission mostly - to intervene in areas hitherto considered sensitive and the prerogatives of member state governments and parliaments, like determining priorities on state budgets, including level of social expenditure. And it can exert influence on the labour market, if for instance wage levels are defined as an indicator. But the devilish thing about the proposals on macroeconomic imbalances is that the indicators are not to be defined until the proposals come into force.

This is where the europact comes in.


Since the proposals were launched in September 2010, there has been many indications that the Commission and important member states want the mechanism on macroeconomic imbalances to cover wages and social expenditure. Statements to that effect were often met with disbelief. To imagine that someone would want the EU institutions to oversee social expenditure and wages sounded like a wild fantasy and unrealistic. The europact shows clearly that it’s not.

As opposed to the other documents, the europact is not a finished legal document, but rather an agreement among member states. The basic elements of the pact are the following:

* The intention is to form a group of countries that acts like a kind of vanguard in the EU on common economic policy and economic governance. The ambitions in the group should be higher than what others are prepared to commit to.

* The eurozone is prepared to go alone with the europact, but others are invited to join.

* The intentions are to “foster competitiveness, employment, and ensure sustainable public finances.”

* The group of countries in the pact is to agree on common objectives each year, and all states in the pact are to draw up annual action plans to reach them.

* While the pact does not specify what means member states are to use, it does emphasise the following as reforms that will be given “particular attention”:
- Wages are to be kept in line with productivity by “reviewing” wage setting agreements, and by ensuring that wages in the public sector foster competitiveness.
- “Flexicurity is to be promoted and tax reforms to lower taxes on labour are to be implemented.
- The retirement age is to be aligned with life expectancy, and early retirement schemes are to be limited.
- Finally, member states have to translate EU fiscal rules (on deficits and debt) into national legislation.

So, how about enforcement? The document reads that “a series of indicators covering competitiveness, employment, fiscal sustainability and financial stability” are to form the basis of monitoring member states. Countries “facing major challenges” will have to commit to addressing them within a given timeframe.


If some parts of the europact sound familiar, it’s no coincidence. There is a big overlap that may confuse at first sight. There is nothing in the europact that cannot be implemented through the reforms – the sixpack – that is to be adopted in June.

So why two separate processes? Why, for instance, does the europact repeat the demand from one of the legislative proposals to have member states adopt rules nationally to enforce the debt and deficit criteria of the Stability Pact?

The answer is that Chancellor Merkel and President Sarkozy who wrote the first draft of the pact, want the architecture on future of economic governance in the EU to be an ambitious one. One that lets wages and social expenditure be issues of common concern and subject to EU decision making. With the europact they’re in a good position. If the final decisions on economic governance in the wider EU are watered down, they can fall back on the europact. For now, they can use the europact to raise the stakes.

Most importantly, as explained above, while the procedure on macroeconomic imbalances fits their agenda, the specifics – the indicators and the specific objectives – have not been identified. With the europact Merkel and Sarkozy have managed to create an alliance that can insist on making wage levels and “sustainability” of social expenditure indicators to be used under the procedure to fight “macroeconomic imbalances”.


Already on the 24th of March, we will have a strong indication whether the latter strategy will work. The eurozone has adopted the europact, but the question remains whether a group of countries that make up a qualified majority in the Council will end up backing it. The eurozone commands 213 votes (or “vote weights”) but needs 255. If they reach that number, everything points to a future economic governance where vital issues like wages and social expenditure will be dealt with in the European Union through elaborate procedures that most will be unable to follow, let alone understand. Mandatory benchmarks will be set, and in the final instance, countries can be fined if they do not stick to the course set by the Commission and the Council. The europact will cease to be a gentleman agreement among heads of state and become the nerve in formal EU legislation on economic governance.

There are yet unknown factors, though. While the six proposals on economic governance went almost unnoticed for months, the europact has made it abundantly clear just how far EU governments are prepared to go. A whole new debate started, and more people are getting involved. At the outset all measures have received warm support from the major players in the business community. The European employers association BusinessEurope, and the lobbygroup European Roundtable of Industrialists see in the new emerging architecture for a common economic policy a realisation of old dreams. Not only is their version of competitiveness placed at the heart of the reforms – there are new and strong methods of enforcement included. On the other hand, trade union opposition is mounting, and many parts of society have voiced concern. It just may be that by June, the whole set up is so controversial that major changes are made, or the whole thing is scrapped.

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