The past week has been an eventful one for economic news, although some of that news has been buried – for instance, the revelation that UK consumers have cut back on their pace of saving this year in order to fund the recovery. In fact, Charlie Bean’s exhortation to get out and spend may have been a little late in the day, given that households are unlikely to keep increasing spending at a faster pace than income for very long. But the big economic news came from Europe.


One of the issues I talked about a lot on my recent trip to Asia was the Greek debt crisis, and the fiscal mess that Europe generally now finds itself in. Ireland’s latest announcement of a further bailout for its stricken banks may have led to an eye-watering deficit – though the 32% of GDP figure for 2010 is a clear example of statisticians not seeing the wood for the trees – but the European Commission’s latest economic missive also garnered headlines.

The Commission is an odd beast. It is essentially the European civil service, but strives to have more power and influence than any national public servants. It is staffed by all manner of clever, if slightly otherworldly, people, and genuinely comes up with good ideas from time to time. In addition, it does a good and subtle job of brainwashing people, such that ex-officials are very pro-Europe, and pro-Commission in particular, even in the face of its biggest mistakes (based on the limited number of ex-employees I’ve met). Overall, though, it is something of a shame that the Commission’s real power is very limited when push comes to shove – as the Greek debt crisis demonstrated only too clearly this year, Barroso is powerless if Merkel doesn’t want to do something. The current AIFM directive is another great example – the Commission has been a bit-part player in the recent trialogue with the Council and Parliament. I, for one, am watching the French-Roma legal saga closely, to see if gum disease really has done too much damage for it to make an impact – but, for now, the Commission is commendably baring its teeth.

All of this means I found the past week’s fiscal proposals slightly depressing. As an economist, I think that many of the suggestions have merit – most obviously, the need to focus on getting debt-gdp ratios back down below 60%. This is clearly a long-term goal, but the complete lack of focus on this in the past decade – despite 60% debt being one of the key Maastricht criteria – made a significant contribution to the mess the euro area finds itself in now.

The proposed punishment, though – a fine of 0.2% of GDP per annum – raised eyebrows. Fundamentally, too many European leaders still do not see the Commission as the independent arbiter of European law and the single market, but instead view it as something of a meddler. This is especially true when it comes to matters of taxation and fiscal policy, which France and Germany will not cede sovereignty over, let alone the UK. Countries are not going to fine each other just on the Commission’s say-so – otherwise, they should have done so during the past decade, when France and Germany flouted the Stability and Growth Pact (SGP). In the end, the SGP was revised instead, and the past week’s new proposals – ‘SGP heavy’, as oppose to lite – do not address this issue head-on.

At the same time, the Commission also overreached itself. As the whole world has just observed, monetary union without fiscal union – the great European single currency experiment – is not a sustainable state of affairs. In the absence of federal taxes and transfers, some form of fiscal discipline is essential. But, in economic terms at least, that same need does not extend to countries outside the currency union. Of course, there are good reasons why governments outside should worry about fiscal deficits, and try to get them under control. But, fundamentally, the economic need for the Commission to punish the UK is basically non-existent – with its own currency and debt, financial markets would pound the UK if the fiscal situation were allowed to get anywhere near Ireland, let alone Greece. Of course, markets have pounded Ireland and Greece as well – but their lack of control over their currency and monetary policy are why the fiscal safeguards are essential. Meanwhile, the shameful one-sided nature of the discussions around trade and current account deficits – and, to be clear, any surplus really is just a deficit seen from a different angle, no matter what the Germans say – has exposed flaws in the Commission’s analysis. In its desperation to keep the big powers happy, and be relevant, the Commission has shot itself in the foot in terms of credibility.

In fact, I’m not sure Europe needs the Commission at all – at least not in its current form. What Europe needs is three distinct things: first, a genuine civil service, handling all the admin of government just like other services throughout the continent; second, some form of policy think-tank or research centre generating ideas, which could happily be government-funded despite the prevalence of private sector alternatives; and third, a credible and independent arbiter and enforcer of the European rules. The Commission currently tries to do all of these things, and does none of them especially well (with the possible exception of bag-carrying). By stepping back, recognising the distinct needs and functions that Europe requires, and thinking in genuinely radical terms, I suspect most Europhiles, and even some ex-Commission officials, would acknowledge this point. I certainly think that genuinely independent institutions (both from governments and each other) would have a better chance of shaping Europe. But, unfortunately, there is little chance of this happening at a high enough level to matter. As long as governments view the Commission with (mainly) disdain, largely ignoring it much of the time, the Commission will keep on scrabbling for power. The key risk is that the longer this continues, the worse the long-term economic consequences will be. Just ask the Greeks.

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