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The Eurozone crisis and EU institutional change: A new CEPR Policy Insight

The Eurozone crisis has produced rapid institutional change with executive powers over national economic policies shifting to the EU. This column introduces a new CEPR Policy Insight that analyses the changes and shifts of power among the EU’s institutions. What is clear is that further reforms are needed in order to safely and accountably underpin new executive power.

Since the Eurozone crisis blew up in 2010, a series of decisions taken at crisis summits have massively centralised at EU level executive powers over national economic policies.

For decades, the centre of gravity of common policies was internal market opening, international trade, and agriculture but now has shifted to the coordination of EU members’ national economic policies, with new legal instruments (the Six Pack, the Two Pack, the Fiscal Compact, the Macroeconomic Imbalances Procedure) and decision-making procedures (the European Semester) tightly constraining national-policy autonomy. Enhanced surveillance powers, extending to ex-ante vetting of national decisions, have been assigned to the European Commission and the ECB.

Most recently, the EU has had to set up in great hurry a full-fledged banking union in order to break the vicious circle between banking and sovereign crises. It is also clear that some form of fiscal union will be needed to provide a fiscal backstop to the banking union as well as to meet new idiosyncratic shocks threatening Eurozone stability.

These changes are not a temporary device for crisis management; they are here to stay since they are necessary to remedy fundamental flaws in the original construction of the Eurozone that would eventually ruin the project. They therefore deserve far more attention than they have received to date.

In a new CEPR Policy Insight (Micossi 2013) I discuss the changing power balance both within EU institutions and between EU institutions and the member states as well as the need for reforms to restore legitimacy and democratic accountability. I also attempt to chart the way forward. 

From rules to discretion in decision making at the EU level

The EU basically works by deciding laws and regulations and then entrusting their application to the Commission and the European Court of Justice. It is in the main rule-setting much more than the exercise of discretion. The crisis, however, required urgent decisions often taken under the dramatic pressure of events. The European Council has emerged as the principal decision maker and has resorted to intergovernmental decision making, out of the Union legal framework, when this appeared necessary to cope with the emergency.

Clearly, the new executive functions taken up by the European Council to tackle the Eurozone crisis entail the direct exercise of discretionary executive powers. The Commission enters the process as an implementing arm, no longer as agenda setter and initiator of legislation.

The intergovernmental approach, however, ran soon into problems as the direct enforcement of discipline by some Eurozone members on other Eurozone members turned out to be politically counterproductive. As a consequence, the European Council had to seek the help of common institutions. The clearest examples are:

  • The Commission’s newfound central role in implementing common policies decided by the Council.

Commission recommendations to the Council in the surveillance over economic policies may be changed by the Council only by a qualified majority (‘reverse’ majority voting). And many decisions, such as issuing an early warning to a member state going off course, are taken by the Commission alone.

  • The establishment of the European Stability Mechanism, which was set up by the Council to meet Eurozone members’ financial needs in times of crisis.

Economic-policy conditions are still decided by the members states in the European Stability Mechanism governing body, but their decisions can be attributed to the institution rather than individual member states; and the implementation of conditionality is again entrusted to the Commission.

Reforms needed to underpin the new executive powers

The next question, then, is how to ensure a stable and predictable structure for the emerging European executive powers in economic policymaking. The ingredients of a solution may include:

  • A stronger EU presidency evolving in the direction of a true head of the European executive.

In this context, one may want to consider electing the Council president – rather than the Commission’s – by a system akin to the US system of electoral colleges in presidential elections; electors would be chosen by national parliaments.

  • Establishment of a European minister of finance and the economy, which would chair the Ecofin Council as well as be a member of the European Commission;

This new figure would be a strong enforcer of the polices decided by the European Council – not the decision maker.

  • Greater resort to majority voting within the European Council, notably by exploiting the 'passerelle' clause of Article 48 §7 TEU to overcome unanimity.1

The effective performance of the Commission’s new functions requires strong expertise and full independence from the member states. The latter would be strengthened by relinquishing the principle of country representation in the composition of the Commission and substantially reducing the number of commissioners from its current ludicrous number.

Democratic legitimacy and accountability

Democratic legitimacy and accountability of the economic governance of the Eurozone and the Union requires first of all re-establishing the role of elected parliaments in the scrutiny of economic-policy decisions taken by the European Council.

Proper scrutiny by the European Parliament of the new economic policies and institutions will eventually mean that the European Council must become accountable to the European Parliament, in a form still to be decided. However, there is no basis for this in EU’s treaties.

The legitimisation of economic policies decided at European level will also have to rely on national parliaments’ indirect legitimisation. The main domain of national parliaments is the preparation of national economic policy decisions and notably the national stability and reform programmes presented to the European Council in the context of the European Semester. Any direct implication of national parliaments in decision making at European level must, in general, be rejected as it would surely lead to complete paralysis.

A multi-level and multi-speed Union

EU members now fall into one of three categories:

  • ‘Eurozone ins’ (the 17 EU members that now share the euro);
  • ‘Eurozone pre-ins’ (those wishing to join EMU but not yet able or ready to do it);
  • ‘The others’ (those who do not intend to join the Eurozone).

Because of the ‘pre-ins’, the Eurozone is a multi-speed system (the objective are shared but time frames differ). Because of the ‘others’, the EU is a multi-level system. The essential point is that, as the European Monetary Union progresses, the large number of ‘pre-ins’ makes it plausible to envisage that the Eurozone may one day cover most EU members.

Therefore, not only must the door remain open for anybody wishing to join the inner circle of integration at a later stage, but the decisions and instruments of enhanced integration shouldn’t prejudge the rights of non-participants in the broader context of the Union.

1 Under this clause, the European Council (heads of state and government) may decide by a unanimous vote that on certain matters the Council of the Union (the ministerial Council formations) will decide by qualified majority.

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