The Van Rompuy draft

28 Jun

This evening, heads of government will discuss a draft proposal put together by the President of the European Council, Herman Van Rompuy, and his team, prepared “in close collaboration” with the heads of the European Commission, the Eurogroup and the European Central Bank. Though it seems the terrain is already being prepared for an inconclusive summit, it worth looking at Van Rompuy’s draft to see exactly what is to be discussed.

The draft is striking by virtue of its conditional wording: there are many ifs, coulds, possiblies and maybies. The whole draft reads as a tentative and rather speculative account of what reforms the EU could take on board if it wanted to move forward with fiscal and monetary integration. There is none of the hubris or confidence one might find in earlier drafts produced by European institutions, confident of their authority and of member state compliance.

There are nevertheless a few measures that seem a bit more thought out and have a whiff of probability about them. One is the integrated supervision of banks, the so-called banking union. This measure seems likely largely because member states can all agree on the point that national regulators have been found wanting. Instead of national regulators that sign off on generous assessments of the state of national banks, something more robust is needed. What is surprising is that the draft – with the presumed agreement of ECB head, Mario Draghi – singles out the ECB as the institution most likely to take on this role. This is surprising because – as Dermot Hodgson as shown – the ECB is generally rather reticent about any attempt at expanding its competences. Far from being a power-hungry supranational actor, the ECB has shied away from taking on new roles. Its sole concern is its price stability mandate: anything else smacks of back-handed attempts at imposing some sort of political oversight onto the bank, a terrible idea according to mainstream central bank thinking. Either it has accepted this new role because it does see it as an opportunity to increase its power or it has had this forced upon it in some way. One reason may be a convergence between Draghi, Van Rompuy, Barroso and Juncker, on the need to set up this banking union in a way that avoids any messy involvement with domestic politics. By placing it within the ECB, Van Rompuy notes in his draft, existing treaty law (“the possibilities foreseen under Article 127(6) of the TFEU”, to be exact) should be sufficient. A tidy legal solution to a thorny problem, and one that Draghi can no doubt appreciate even if it means a slight expansion in the ECB’s remit.

On the “integrated budgetary framework”, another important chunk of Van Rompuy’s draft, it is obvious what might be accepted by national leaders and what remains pretty unlikely. The key suggestion is that stronger measures to control the upward end of government spending need to be introduced. Van Rompuy suggests that in the end “the euro level area would be in a position to require changes in budgetary envelopes if they are in violation of fiscal rules”. This begs the question of what the sanction would be exactly – probably, fines of some sort – but it also makes clear how the evolution of economic governance in Europe is following well-trodden lines. What is being suggested here is really a constitutionalizing of limits to what governments can spend: exactly what national governments have been discussing for some time and what former French President Nicolas Sarkozy had proposed in France.

The push to make excessive spending truly illegal is hardly new and the ideas are familiar to anyone who followed the events of the 1990s and the Maastricht criteria. Overwhelmingly, economic growth is assumed to come from private sector activity, supply-side reform and from a focus on exports. There is to be a minimal role for public spending in any national growth strategy. National government discretion with regard government spending, and especially the idea that market instability should be compensated by discretionary uses of the public purse, has little role to play in the draft. That the fiscal excesses were more consequence than cause of the present crisis, and were initially the result of massive wealth transfers in the form of bank bail-outs after the Lehman Brothers collapse, is not taken into account. Even the part of the draft that mentions a “European resolution scheme” to be funded by bank contributions – “with the aim of orderly winding-down non-viable institutions and therefore protect tax payer funds” – pales in comparison to the tax-payer funded European Stability Mechanism that is vaunted as a possible “fiscal backstop to the resolution and deposit guarantee scheme”.

What remain far more tentative are the parts that describe the issuance of common debt and the creation of a fully-fledged European treasury: ideas that are being firmly resisted by Chancellor Merkel. And the mention of strengthening democratic legitimacy is an afterthought in a draft that focuses on measures intended to restrict as much as possible the room of manoeuvre for nationally-elected representatives.

There is little evidence of federalizing ambition in Van Rompuy’s draft. The most likely measure – the banking union – is proposed in a way that avoids having to rewrite any existing laws. The suggestions about common budgetary rules are driven by national governments so lacking in authority that they need binding external frameworks in order to impose any sort of fiscal discipline on their own societies. The reaction to this end of week summit will most likely be disappointment at what is not in the final communiqué. But judging from Van Rompuy’s draft, the real problem is what is in it.

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