Macro-economic coordination across the Eurozone is essential for the long-term stability of the region and the survival of the Euro. EU officials are currently working on a revised “Pact for Competitiveness” ahead of the next EU Summit in March. This follows the rejection of the initial pact, jointly proposed by Germany and France. This called for a whole range of initiatives aimed at improving the competitiveness of Europe and reducing the degree of economic diversity across the Eurozone.
Initiatives included raising retirement ages across the Eurozone, harmonizing corporate and other tax rates, implementation of a “debt brake” to limit the ability of governments to fund spending via borrowing and a monitoring system for wage a productivity levels that would force countries to lower employment costs (for example by forcing countries to end the indexation of wages to inflation) if they rise too fast.
Probably the most contentious issue was the mention in the original pact of the need for a “sanctions mechanism” or, in other words, details of the punishment for breaking the rules, and the obvious question: who does the punishing?
It is perhaps not surprising that the revision of the plan that will go forward for discussion on March 11 is being prepared by EU officials. It appears many of the initiatives remain the same, including the “debt brake” and the monitoring system for state pensions. The key difference is that the implementation of the plan will would be run by the European Commission rather than national capitals. That will allay fears of many of the smaller Eurozone countries.
It is true the immediate concern for markets remains fiscal policy and the look and feel of the new European Stability Mechanism that will replace the European Financial Stability Facility from mid-2013. However, that question cannot be answered satisfactorily without knowing the answer to the broader question of the go-forward governance framework for Europe. That’s why there hasn’t been satisfactory answers to date and why debt initiatives to placate markets have had to be reactive rather than proactive. It’s now time for Europe to get in front of the problem.
For further discussion on this topic and others, watch out for the March issue of QSO, coming to an email inbox near you on or about Friday March 11.