On 14 July, Agnès Bénassy-Quéré, Professor at the Paris School of Economics as well as chair of the French Council of Economic Analysis, gave a SAFE Policy Center lecture on “Euro Area Policy Making – in Need of More Europe”. The lecture was moderated by Hans-Helmut Kotz.
Bénassy-Quéré outlined that, ever since the beginning of the European Monetary Union, euro area policy making has been struggling with the required degree of integration or coordination between policy areas. The rule-based system of Maastricht was found wanting in face of the challenges arising from the financial crisis and, subsequently, the severe sovereign debt problems, she said.
The crisis was, inter alia, caused by fiscal profligacy in some euro area countries, large capital inflows in non-tradeable sectors, excess leverage and too-big-to-fail problems in the banking sector, as well as nominal divergences between member states. Accoring to Bénassy-Quéré, euro area policy coordination has focused too much on fiscal sustainability and too little attention has been given to nominal divergences, for instance in price and wage variations. For example, before the crisis, nominal unit labor costs had increased in countries like Spain, Ireland, Greece and Italy, lowering their competitiveness vis-à-vis France, Austria or Germany. Also, not all countries hit by the crisis ran a high budget deficit in 2007, but, all crisis countries had recorded large external current account deficits at that time. Thus, she concluded current account deficits can serve as an indicator for imbalances building up in the euro area and that policy coordination should correct such macroeconomic imbalances, i.e. through competitiveness policies and demand management.
The EU recognized that policy coordination on the basis of the Stability and Growth Pact (SGP) is insufficient and introduced, in 2010, the “European Semester”, which runs from November to July and is used for macroeconomic surveillance in the euro area. At the end of each semester, the European Commission makes recommendations to euro area countries based on the Annual Growth Survey which should be taken into account when deciding about the national budgets.
Bénassy-Quéré identified three main problems of the structure of European Semester: First, there is only weak integration between the euro area level of surveillance and the country level; second, there is an unclear dividing line between short and medium-term surveillance (SGP, Macroeconomic Imbalance Procedure) and long-term monitoring (EU2020 growth strategy) and, third, the ownership of country-specific recommendations at the national level is weak. To overcome these problems, Bénassy-Quéré proposes to restructure the European semester by separating the euro zone surveillance and member state surveillance into different steps and also using more focused instruments for fiscal policy coordination, competitiveness policies and macro-prudential policy each.