European economic policy and the financial and economic crisis: mixed responses

Aurélien Evrard
The finance package for Greece: a façade agreement.
French official position regarding the finance package for Greece remained rather unclear. On the one hand, President Sarkozy supported since the beginning the idea of European initiatives in favour of Greece. He assumed that “we could not drop a member of the Eurozone, otherwise the Euro would be meaningless.”[1] On the other hand, and partly following the German position, the Minister for the Economy, Christine Lagarde, assumed that Europe should not be indulgent towards Greece.[2] This position was strongly criticised by the Socialist Party (PS), regretting the “disappearance of political Europe” and the return of “national egoisms, whereas we were expecting a deed of generosity from most of European governments.”[3] The agreement that was finally reached at the European Council (25 and 26 March 2010) was considered a “façade agreement”. According to Jean-Pisani Ferry from economic think tank Bruegel: “what markets want, is a confirmation that the Eurozone members will not drop Greece, and this will only happen if they lend it money and if interest rates decrease, not before that.”[4]
Reacting to the nature of this agreement, Jacques Delors, former President of the European Commission, confesses that he is “wounded by the intervention of the International Monetary Fund (IMF) […]. The European Union has the means to solve this crisis by herself and to demonstrate that the Euro foundations are strong.”[5] Economists from the French progressive think tank Terra Nova share this admission of failure from the European Union. More pessimistic than Jacques Delors, they also assume that this crisis reveals the weakness of the EU. According to them, legal mechanisms to rescue Greece did not exist. Therefore, this agreement appears as an arrangement ad hoc that only avoided the worst scenario: a traditional/classical intervention from the IMF.[6]
The Stability and Growth Pact strongly criticised: the need for reform
Many critics have emerged against the Stability and Growth Pact. According to left-wing daily Libération, the Greek crisis has demonstrated that both the Maastricht Treaty and the Stability Pact have partially failed.[7] French economist Michel Aglietta assumes that, although European member states must display solidarity, the Stability Pact represents a serious constraint for all members of the Eurozone. It is necessary, he says, not to try to decrease the public deficit too rapidly. It would be impossible to come back to the rules of the Stability Pact before 2013. The priority is to reach a growth rate higher than the real interest rate.[8] As a matter of fact, the Minister for the Economy, Christine Lagarde, spoke out for reform of the Stability Pact, considering that all the criteria, notably the deficit and debt-to-GDP (Gross Domestic Product) ratios, are not in themselves sufficient to foster economic convergence within the Eurozone.[9] Economists from the progressive think tank Terra Nova agree wholeheartedly with her, even considering both criteria as “paper tigers, that are temporarily forgotten when a big state (France, Germany) might be sanctioned for an excessive deficit.”[10] As a consequence, there is a need to reinforce the Stability Pact, for example, by opening the possibility to audit national budgets or applying sanctions to excessive deficits. Such an option considers that the Stability Pact represents the best compromise between national autonomy and the discipline needed to prevent free-riders strategies. However, according to both French experts, this option, which is close to the 2005 reform of the Stability Pact, will not alone allow the European stalemate to break.
Consensus on a need for a strong coordination of economic policies in Europe
A crucial explanation for this crisis lies, according to Jacques Delors, in the imbalance in favour of the monetary pillar, on which the Economic and Monetary Union was founded. In the absence of real coordination of economic policies, little attention has been paid to the financial evolution of many countries.[11] Thus, according to Dominique Strauss Kahn, IMF Managing Director, the Eurozone needs to make structural reforms and give a political signal to the markets. Consequently, this crisis provides an opportunity for Europe to strengthen and deepen its internal integration and cooperation in the economic field. This implies that not only a stronger coordination of economic policies is necessary, but also an integrated framework for crisis prevention and management and a concerted effort to stimulate growth and create jobs.[12]
Former right-wing Prime Minister Edouard Balladur shares this point of view. Eurozone membership, he assumes, cannot be restricted to the management of the currency, but must also include the economic management of the member states. The economy of the Eurozone will maintain its dynamism only if the single currency is supported by coordinated economic and budgetary policies. The time has come for the Eurogroup to step in to approve governmental financial plans before the respective governments submit them to their national parliaments. It is not a matter of going into the details of every single measure: assessing the global volume of public spending will suffice. The Eurogroup should be called upon to assess the validity of the figures that are presented. The members of the Eurogroup should reach a decision through a qualified majority vote. It should be the “real” second step of the Economic and Monetary Union.[13]
Economists from the progressive think tank Terra Nova also consider the coordination of economic policies as a policy option, observing that the Open Method of Coordination (OMC) that was used until now did not permit significant progress. Many options are identified in order to reinforce this coordination:

  • Integrating new competences that have been, until now, preserved by member states (e.g., giving a compulsory objective for budget balance) or submitted to OMC (e.g., structural reforms such as labor market or higher education). A consensus is, however, lacking on this issue.
  • Getting the Commission involved into the surveillance of member states’ macroeconomic policies and not only of its public finance. Furthermore, the ECOFIN Council could be invited to discuss the cohesion of the Eurozone more often.
  • Reinforcing the Eurogroup by organising steady meetings of heads of state and government, formalising its procedures, or even giving the president of the Eurogroup the competences to represent the group at the G8.

Europe 2020 Strategy: the story of an announced failure

The Europe 2020 Strategy did not occupy a crucial position in French public debate, and the Greek crisis is not the only explanation for this. According to Laurent Cohen-Tangui, the main reason is that the Europe 2020 Strategy is nothing but the same as the Lisbon Strategy that it is supposed to replace.[14] Considering the conditions of its formulation, economists from the think tank Terra Nova do not see how this failure could be avoided. Once more, it is to be expected that this strategy will remain a juxtaposition of national policies and rely on the member states’ good will. Concerning the contents, the main issue should be the budget of the EU (increase of the budget, implementation of EU resources, etc.), but the Europe 2020 Strategy skips over it.[15] Pascal Canfin, a Green MEP, also criticises this strategy, which is “again only based on more growth.” Rather than competition, Europe should have quality of life as an objective and build its strategy on sustainable economy and social welfare.[16] Thus, there seems to be a consensus on a global deception regarding this new project of the EU. Considering not only the contents but also the implementation procedure of Europe 2020 Strategy, its global assessment could be summarised by an expression given by Bruno Vever: “never change a loosing strategy.”[17]

[1] AFP: Ne pas abandonner la Grèce, 06/03/2010.

[2] Lagarde, C.: Le Journal du Dimanche, 25/04/2010.

[3] Le Figaro: Le PS déplore la fin de l’Europe politique, 26/04/2010

[4] Libération: Le plan de sauvetage a fait pschiiiiiiiitttttt, 09/04/2010.

[5] Delors, J.: Interview to Paris Match, 21/04/2010.

[6] Chalumeau, T./Léris, J.: Les leçons de la crise financière ou l’impossible statu quo européen, Note de la fondation Terra Nova, 06/04/2010.

[7] Libération: La Grèce pousse l’Europe à changer de régime, 26/02/2010.

[8] Aglietta, M.: Interview to Les Echos, 08/02/2010.

[9] Lagarde, C.: Interview to Le Monde, 03/05/2010.

[10] Chalumeau, T. /Léris, J.: Les leçons de la crise financière ou l’impossible statu quo européen, Note de la fondation Terra Nova, 06/04/2010.

[11] Delors, J.: Interview to Paris Match, 21/04/2010.

[12] Euractiv: Summit paves the way for common EU economic policy, 29/03/2010.

[13] Balladur, E.: Mieux gouverner l’Europe, Le Figaro, 17/02/2010.

[14] Cohen-Tangui, L.: La stratégie européenne de l’Europe manque toujours autant de crédibilité, Les Echos, 27/04/2010.

[15] Sénès, B./Roselbi, A./Barthez, V.: UE 2020: L’Europe n’a pas les moyens de ses ambitions, Note de la fondation Terra Nova, 20/04/2010.

[16] Communiqué de Presse Europe Ecologie, 03/03/2010.

[17] Vever, B.: Fenêtre sur l’Europe, 01/04/2010.