European Commissioner for Finance Olli Rehn
Facing the prospect of Greece’s financial woes destabilizing the European economy, EU finance commissioner Olli Rehn proposes that national budgets in the euro zone are to be subjected to a regulatory system akin to the German Finance Planning Council. In this system, German budget policies are co-determined by the federal government and the states.
Stating that the Stability and Growth pact “lacked teeth”, Rehn argues that a regulatory body will ensure the fiscal discipline that is necessary to counter imbalances in the euro zone. Indeed, the peer pressure method of implementing the pact has proven that member states are able to dilute the terms of the Stability and Growth pact. Greece’s – and other EU countries such as Belgium, Italy and Poland – use of derivatives to mask national deficits was a case in point. Using this method, Greece was reportedly able to borrow 1 billion Euros without adding to its public debt. Although the type of derivative contract Greece participated in has since been outlawed, it remains a demonstration of the necessity for fiscal oversight.
Considering that the events have demonstrated the necessity of fiscal transparency, Rehn’s promise of providing Eurostat with “serious auditing powers” will be a very useful tool in coordinating national budgets. In fact, Rehn’s proposal was suggested by the Commission in 2005. The proposal was however rebuffed by national governments carefully guarding their budgetary powers. The Greek tragedy has undoubtedly softened the member states positions on this issue. The finance commissioner also cites the Lisbon Treaty’s Article 136, which provides for the “proper functioning of economic and monetary union”, as a tool which is to be used to obtain fiscal coordination.
The EU’s economic desynchronization will make coordination efforts all the more difficult. On the one hand, the so-called PIIG countries (Portugal, Ireland, Italy, Greece and Spain) are facing austerity measures. On the other hand, countries such as Germany and France – who are expected to foot much of the bill – see no reason to tighten their belts. Obviously, such imbalances are not viable. Nevertheless, the Commission will have a tough time persuading national governments to loosen their grip on budget making competencies. In the case of the countries facing austerity measures, governments will have to contend with voters that are not thrilled by the prospect of cutbacks. In the case of Germany, the population has a hard time accepting that they are stuck with the bill.
Rehn states that there has been “broad support” within the Commission for his proposal. Commission support is of course not the real issue. Rather, the proposal’s reception among representatives of national governments will be the real test. We shall see how things play out when the European Commission presents its proposal on May 12.
