The coordination of EU budgets

The French government has just transmitted its 2015 draft budget for review to the European Commission. The possibility that the Commission may ‘invalidate’ this budget has shed light on the Excessive Deficit Procedure, and more generally on the new framework for EU macroeconomic coordination. The latter has, like the Excessive Imbalance Procedure I mentioned last year, a rather old story, that even largely predates the introduction of the euro.

Some of the first attempts at macroeconomic coordination happened in the 1960s. Robert Marjolin and later Raymond Barre, both French commissioners for economic affairs, suggested a series of measures to improve macroeconomic cooperation among the six members states of what was then still the Europeazn Economic Community (EEC). Both commissioners stressed the need to better synchronise European economic policymaking at different stages in time: short, medium and long term. To this end, several committees were created, including the Short-Term Economic Policy Committee (1960), the Budgetary Policy Committee (1964) and the Medium-Term Economic Policy Committee (1964). The proposals were still strongly influenced by economic planning – the French planification – and Keynesianism.

In the 1970s, the debate surfaced again on numerous occasions. The collapse of the Bretton Woods system had created instability in European currency relations, and many European policymakers were willing to restore that lost stability. But how could a system of stable exchange rates be sustained if the macroeconomic policies of the EEC members states were still diverging?

 

Convergence

On 18 February 1974 the EEC Council of Ministers took a decision “on the attainment of a high degree of convergence of the economic policies of the member states of the European Economic Community.” This decision was still largely inspired by some of the debates from the Werner Plan on the creation of an Economic and Monetary Union in the EEC. The Council thus explained that

there can be no gradual attainment of Economic and Monetary Union unless the economic policies pursued by the member states henceforth converge and unless a high degree of convergence is maintained.”

The general idea was to outline “economic policy guidelines (…) at Community level.” As the Marjolin and Barre proposals earlier, they were equally aimed at covering various aspects of economic policymaking, from short-term to long-term. An Economic Policy Committee (EPC) was also set up, that replaced the three committees created in the 1960s. Article 3 of the Council decision even stated that

 (…) quantitative guidelines for the draft public budgets for the following year shall be fixed before these budgets are finally adopted and shall cover developments in government expenditure and revenue, the nature and extent of budget surpluses and deficits and the way the latter are to be finance or used.”

The 1970s were chiefly troubled by inflation. EU economic convergence was then less measured in terms of debt and deficit ratios to GDP, but rather with respect to the implementation of strong and consistent anti-inflationary policies. While West Germany was performing relatively well over that period, France was not; the French governments practiced stop-and-go policies that did not prove very effective in combatting inflation (see table below).


This differential between the French and German inflation rates rendered monetary cooperation difficult. But it also made greater macroeconomic coordination among these two countries – and across Europe more generally – increasingly necessary.

 

Sanctions

If these decisions and committees highlighted many important issues and challenges, some of which are still with us today, their recommandations were not quite followed or respected. The absence of sanctions – or the absence of a “corrective arm” in today’s parlance – certainly contributed to make the 1974 Council decision little followed.

The advent of the euro witnessed more famous attempts at trying to coordinate the member states’ budgets, including the Stability and Growth Pact from 1997, and, more recently, the whole set of measures taken after the start of the European sovereign debt crisis in 2010.

The stakes, scope and means associated with today’s Excessive Deficit Procedure are of course much higher than they have ever been in the past. The existence of sanctions, apart from anything else, represents an important difference from what existed, and even what was simply envisaged, in the 1960s and 1970s. But today’s procedure also highlights a strong continuity: the difficulty of reaching a high degree of macroeconomic cooperation among EU members. A difficulty that is a central challenge to the operation of the single European currency.

 

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