National parliaments and the “Five Presidents’ Report’: The long road towards the democratization of EMU

Ton van den Brink, Associate Professor, University of Utrecht

The recent ‘Five Presidents’ Report’ contains far-reaching proposals to deepen the EU’s Economic and Monetary Union (EMU), which have been analyzed here. These proposals also have far reaching consequences for national parliaments. The much needed democratization of the EMU requires national parliaments to be assigned with stronger rights than the proposed intensification of ‘dialogues’.

What is at stake for national parliaments? The report proposes to come to a ‘system of further sovereignty sharing within common institutions’ (p. 5). This system would include, inter alia, a further Europeanization of economic policy coordination, aimed at economic convergence of the Euro area. To that end, the European Semester would be restructured and national ‘Competitiveness Authorities’ would be set up in the Eurozone Member States. The proposals to establish a Fiscal Union include the creation of an advisory European Fiscal Board and a common macroeconomic stabilisation function to ‘better deal with shocks that cannot be managed at the national level alone’. This last element is similar to the tax authority proposed by German Minister Gabriel and French Minister Macron as part of their plea for a radical integration of the Eurozone. It is unclear, however, how the more long term perspective of creating a European treasury would relate to national treasuries.

There are more unclarities which make it difficult to assess how national parliaments would exactly be affected. The European Fiscal Board would, for instance, only have an advisory role. The general direction of the proposals is, however, clear. The proposals would increase control of EU institutions over national policies. Thus, a further Europeanization of economic policy making would be the result. Second, the technocratic nature of decision making would be strengthened. The further expansion of ‘rule-based cooperation’ and the mandates of the new bodies would significantly contribute thereto.

Europeanization and technocratization pose challenges for national parliaments. These are not addressed, even though the report underlines that democratic legitimacy and accountability should be the corner stones of the EMU. The proposals in this regard do not add much to the already existing ‘six-pack’ and ‘two-pack’ arrangements and in any case do not extend beyond ‘streamlining’ procedures and the strengthening of ‘dialogues’.

The answer to these challenges cannot be the European Parliament, at least not the European Parliament alone. It is true that the executive federalism that may be witnessed in the field of economic policies requires a better position for the European Parliament as well. But the European Parliament cannot substitute national parliaments in economic policy making. First, there is no real solution for the role of the European Parliament - representing citizens from 28 Member States - in decision making on measures that are limited to the Euro area. Second, a substantial part of economic policy making is country specific. This will remain so, even though the Five Presidents’ report contains proposals to strengthen the euro area wide dimension of economic policy making. National parliaments certainly qualify as the most obvious institutions to exercise democratic control over the country specific part of economic policy making in the EU. Thirdly, national parliaments’ constitutional rights are affected in a very concrete manner by the proposals. Thus, strengthening their role would also contribute to compensating that loss.

Taxation and budget rights are among the most concrete constitutional rights that are at stake for national parliaments. The right to decide on the national budget implies budget autonomy. The German constitutional court, in its decision on the constitutionality of the ESM-Treaty, ruled that: ‘Deciding on public revenue and public expenditure is a fundamental part of the ability of a constitutional state to democratically shape itself. In this context, the right to decide on the budget is a central element for shaping opinions in a democratic society’. 

Thus, the German constitution (as well as the constitutional systems of many other Member States) would not allow the national budget right to be relinquished altogether. Although the German constitutional courts accepted the possibility of – even significant – limitations to national budget autonomy, a suspension thereof for at least a considerable period of time, would be considered unconstitutional by the German constitutional court. The creation of a Macroeconomic Stability Function would need to pass this test before it could be created. What is more, the Court made it clear that it had formulated only minimum conditions and stressed the discretion of the German legislature ‘to weigh whether and to what extent, in order to preserve some discretion for democratic management and decision-making, one should enter into commitments regarding future spending behaviour and therefore – correspondingly – accept a restriction of one’s discretion for democratic management and decision-making in the present’.

Closely related (but in various constitutional systems recognized as a separate right) is the right to decide on taxation. The constitutional significance of this right, as well as its “sovereignty-sensitivity” have made it impossible thus far to come to supranational taxes. The feasibility of a Euro area wide treasury – whatever its exact form – is, thus, highly questionable.

The position of national parliaments is also at stake with regard to macroeconomic policies, which have redistributive effects. Specific national constitutional guarantees are generally lacking in this area, but a Europeanization of these policies is still particularly troublesome. This has to do with the lack of common substantive principles or rules. Unlike fiscal policies – which are ‘rule-based’, such as the 3% rule - macroeconomic policies are essentially political decisions, e.g on how labour markets and pension systems must be reformed and whether and how national investment climates must be improved.

In this light, the proposals from the Five Presidents’ report are too meagre for national parliaments to ensure effective democratic control. It has to be acknowledged that - should all of the plans indeed be realized - national parliaments would be limited in their national decision making capacities on fiscal and economic policies. This limitation of decision-making power should be compensated by adequate accountability rights. It would therefore be far from sufficient to organize plenary debates between the EP and the Commission and streamline the interaction between the Commission and national parliaments and between the European Parliament and national parliaments.

The relationship between the Commission and national parliaments should be the starting point for strengthening the position of the latter. It is one thing to get the EU Commissioner to the national parliament to discuss country-specific recommendations, but without the possibilities of sanctions this remains an empty shell. The rules that have been developed in the context of EU legislative procedures (most notably with regard to subsidiarity scrutiny) may offer inspiration here. The right to make the Commission reconsider a legislative proposal could, for instance, be applied in the context of economic and fiscal policies as well: the national parliament at issue could be empowered with the right to object to country-specific recommendations which would lead to obligation for the Commission to reconsider these. In case of the macroeconomic stabilisation function the existing mechanisms of cooperation between national parliaments in the context of subsidiarity scrutiny could offer inspiration. This could be linked to the right of assent for - a qualified majority of – national parliaments.

The exact shaping of national parliaments’ rights is, however, essentially a second order issue. To get to that issue, it first needs to be acknowledged that a genuinely democratic EMU requires national parliaments to have more at their disposal than the right to be informed and to take part in economic dialogues.

Barnard & Peers: chapter 19

Photo credit: www.clivebates.com

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The Five Presidents’ Report on Completing the EMU: A Glimpse at the Future of Europe

Menelaos Markakis, DPhil student at University of Oxford, Academy of Athens scholar

On 22 June 2015 the Presidents of the EU and Euro area institutions presented their report on ‘Completing Europe’s Economic and Monetary Union’. The report provides a roadmap for ‘deepening’ and ‘completing’ the Economic and Monetary Union (EMU). Building on the measures enacted to combat the crisis, the Five Presidents’ Report makes a wealth of valuable suggestions for strengthening the EMU governance framework and deepening economic integration in the Euro area. The EU Presidents recommend that progress be made towards a genuine Economic Union, a Financial Union, a Fiscal Union, and a Political Union.

An overview of the proposed reforms

The proposed reforms would be implemented in two consecutive stages. In the first stage (1 July 2015 – 30 June 2017), the EU institutions and Member States ‘would build on existing instruments and make the best possible use of the existing Treaties’ (p. 5). In the second stage (mid-2017 to 2025), ‘concrete measures of a more far-reaching nature would be agreed to complete EMU’s economic and institutional architecture’ (p. 5). What follows is perforce merely a general indication of the content covered within the report.

(i)                 A genuine Economic Union

As regards the economic ‘pillar’ of the EMU, the Five Presidents’ Report recommends that each Euro area Member State create a Competitiveness Authority which would be ‘in charge of tracking performance and policies in the field of competitiveness’ (p. 7). The rationale behind this proposal is twofold. Such bodies ‘would help to prevent economic divergence’ and ‘would increase ownership of the necessary reforms at the national level’ (p. 7).

It is patently clear that these Authorities are expected to boost economic convergence in the Euro area, most notably in relation to policy areas which fall outside the EU’s competence. These bodies would have a mandate to ‘assess whether wages are evolving in line with productivity and compare with developments in other euro area countries and in the main comparable trading partners’ (p. 8). Moreover, ‘these bodies could be mandated to assess progress made with economic reforms to enhance competitiveness more generally’ (p. 8). The Five Presidents’ Report further recommends that a Euro area system of Competitiveness Authorities be created, in order to coordinate the actions of these Authorities on an annual basis.

The report seeks to link this proposed technique of policy co-ordination to already existing forms of rules-based governance in the Euro area. The Commission is expected to ‘take into account the outcome of this coordination … in particular for … decisions to be taken under the Macroeconomic Imbalance Procedure (MIP), including whether to recommend the activation of the Excessive Imbalance Procedure’ (p. 8). In principle, Euro area Member States are and would remain free to choose whether to follow the best practices in Europe. However, if they choose not to, the Commission and Council might respond to such divergence by subjecting the Member States concerned to the Excessive Imbalance Procedure. In this connection, the presidents of the institutions explicitly recommend that the corrective arm of the MIP be used ‘forcefully’, in order to ‘encourage structural reforms’ (p. 8). Furthermore, they do not shy away from adding that social partners ‘should use the opinions of the Authorities as guidance during wage setting negotiations’ (p. 8).

At a later stage, ‘the convergence process would be made more binding through a set of commonly agreed benchmarks for convergence that could be given a legal nature’ (pp. 5 and 9). These binding standards would be laid down in EU legislation. In some areas, this would lead to ‘further harmonisation’ (p. 9). In other areas, ‘it will mean finding country-specific solutions’ (p. 9).  ‘Significant progress towards these standards – and continued adherence to them once they are reached – would be among the conditions for each euro area Member State to participate in a shock absorption mechanism for the euro area’ (p. 5), which will be discussed below (iii).

It is not clear which competence basis the EU institutions would use for the adoption of such instruments. It might be the case that the Five Presidents’ proposals rest on the implicit assumption that the EU Treaties will be amended before or during stage two of this process. It might also be the case that the EU institutions plan to make full use of Articles 114, 136, 153 and 352 TFEU and/or of the Treaty provisions on enhanced cooperation.

In this connection, the Constitutional Affairs Committee of the European Parliament has proposed that binding economic policy guidelines for the Euro area countries be adopted on the basis of Article 136 TFEU (p. 10 para. 15). It has further called for ‘the dropping of the restrictions under Article 136 TFEU’ and for ‘the upgrading of this article into a general clause for the adoption of legal acts concerning the coordination and setting of legally-binding minimum standards with regard to economic, employment and social policy’ (p. 16 para. 73). This would give more say to the European Parliament on Country-Specific Recommendations.

Moreover, it should not escape our notice that ‘Country-Specific Recommendations would continue to be used in this context’ (p. 9). Furthermore, the report suggests that the MIP ‘be utilised as a tool … to foster reforms and monitor progress in each euro area Member State towards these common standards’ (p. 9). As such, rules-based and co-ordination based governance techniques would continue to ‘form “hybrid” normative grids and accountability frameworks’ (Armstrong).

(ii)               Towards a Financial Union

As regards the proposed Financial Union, the Five Presidents’ Report recommends that the Banking Union be completed and that the Capital Markets Union be launched. First, the report recommends the full transposition into national law of the Bank Resolution and Recovery Directive. It is recalled that, in the opinion of the Commission, 11 Member States have not fully implemented the Directive into national law. Second, the report argues that, before the Single Resolution Fund (SRF) is sufficiently capitalised, an ‘adequate bridge financing mechanism’ should be created for banks that need to be orderly unwound (p. 11). Third, a common backstop to the SRF should be implemented. In the opinion of the EU Presidents, this could be achieved through a credit line from the European Stability Mechanism (ESM) to the SRF (see p. 11). ‘In due course, the effectiveness of the ESM’s direct bank recapitalisation instrument should be reviewed, especially given the restrictive eligibility criteria currently attached to it’ (p. 11). Fourth, the report recommends that a European Deposit Insurance Scheme be launched. Fifth, it proposes strengthening macroprudential supervision at EU level and ‘review[ing] the treatment of bank exposures to sovereign debt, for example by setting large exposure limits’ (p. 12).

Building on the Commission’s Green Paper on ‘Building a Capital Market Union’, the report further proposes launching a Capital Markets Union for all 28 EU Member States. This would ‘ensure more diversified sources of finance’ and would ‘strengthen private sector risk-sharing across countries’ (p. 12). However, financial integration carries risks with it, because a problem in one country can rapidly spread to another. As such, the Five Presidents’ Report recommends that financial supervision be strengthened in the EU and that a single European capital markets supervisor be created (p. 12).

(iii)             Towards a Fiscal Union

As regards the proposed fiscal union, the Five Presidents’ Report puts forward two proposals. First, it recommends that an advisory European Fiscal Board be created. This body would coordinate and complement the national fiscal councils that have been set up in accordance with Regulation 473/2013. The European Fiscal Board ‘would provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal framework’ (p. 14), thereby adding extra pressure on national Executives and legislatures to take EU fiscal rules seriously. ‘Such a European Fiscal Board should lead to better compliance with the common fiscal rules, a more informed public debate, and stronger coordination of national fiscal policies’ (p. 14).

Second, the report proposes the creation of a fiscal stabilisation function for the Euro area. Such a mechanism would enhance public risk-sharing in the Euro area (p. 4) and could build on the European Fund for Strategic Investments. However, it ‘should not lead to permanent transfers between countries or to transfers in one direction only’ (p. 15). ‘It should also not be conceived as a way to equalise incomes between Member States’ (p. 15). Notably, this stabilisation function ‘should be developed within the framework of the European Union’ (p. 15, emphasis added).

Democratic Accountability, Legitimacy, and Institutional Reform

The discussion thus far has focused on the economic reforms proposed by the presidents of the EU institutions. The focus now shifts to proposed reforms for enhancing the democratic credentials of the EMU. Save for the proposals for a more timely and better-structured parliamentary debate during the European Semester (see p. 17), it is hard to see how these proposals add anything to the already existing ‘six-pack’ and ‘two-pack’ arrangements for ‘institutional dialogue’. Be that as it may, the added emphasis on the role of social partners and civil society, as well as on consultation with EU-level social partners, should be readily applauded (see p. 22).

There is a strong focus on output legitimacy and on synergies between the European and national parliaments. ‘After many years of crisis, governments and institutions must demonstrate to citizens and markets that the euro area will do more than just survive. They need to see that it will thrive’ (p. 5).

Moreover, the report lays down a number of proposals for strengthening the EMU governance framework. More specifically, the EU Presidents suggest that the various treaties concluded outside the formal confines of the Lisbon Treaty be incorporated into the EU Treaties and secondary legislation and that the governance structure of the ESM be ‘fully integrated within the EU Treaties’ (p. 18). The report further suggests that a full-time presidency of the Eurogroup be considered and proposes the creation of a Euro area treasury (see p. 18). In the opinion of the authors of the report, ‘the world’s second largest economy cannot be managed through rule-based cooperation alone’; ‘it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions’ (p. 5). The division of labour between a Euro area and national treasuries is not made clear.

Regrettably, there is no elaboration of what accountability structures should be put in place if a Euro area treasury or fiscal stabilisation function were to be created. Likewise, there is no analysis of the desired accountability mechanisms for the proposed Financial Union. To be sure, requiring the consent of the European Parliament for the appointment of the Chair and the Vice-Chair of the Supervisory Board was a major step forward (see Article 26(3) of Regulation 1024/2013). What is more, there are no proposals for improving transparency in the workings of the Eurogroup, whose role in economic governance has now been heightened. A body actively seeking to foster economic convergence among Euro area countries (see p. 9) should not operate behind closed doors.

Final remarks

There will be no attempt to summarise the preceding argument. It is nonetheless worth highlighting certain features that are of particular importance. First, since ‘all euro area Member States must participate in all Unions’ (p. 5), these proposals would, if implemented,  put the idea of a multi-speed Euro area to sleep. To be sure, it might still be the case that not all Euro area Member States would meet the requirements to make use of the proposed shock absorption mechanism. Second, the EU Presidents’ proposals would, if implemented, entail a massive upward flow of power from the national to the EU/Euro area institutions and bodies. Arguably, this should be matched by increased democratic controls and robust accountability mechanisms. Third, it is particularly noteworthy that the report notes that all members of the Euro area should gain from EMU membership (p. 4). Spreading welfare gains across the Union and promoting economic, social and territorial cohesion might require that more thought be given to the EU’s regional and structural policies (see also the 1989 Delors Report). Lastly, at least some of the proposed reforms might require a Treaty amendment in order to be implemented, and therefore the Prime Minister of the United Kingdom might get his chance to renegotiate Britain’s relationship with the EU and to enshrine the desired precepts in primary law.

Barnard & Peers: chapter 19 

Photo credit: roarmap.org

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