What to expect from the Commission's new economics team

Will France's Moscovici (left) be effectively shackled by
Finland's Katainen (centre) and Latvia's Dombrovskis (right)?

The new European Commission (EC) also sees the overhaul of its approach to the Eurozone. While Pierre Moscovici holds the Economic and Financial Affairs post (essentially Olli Rehn’s successor), he will be overseen by the Vice Presidents (VPs) for Jobs, Growth, Investment and Competitiveness and the Euro and Social Dialogue – Jyrki Katainen and Valdis Dombrovskis respectively.

An edge has been added to all this with quick German criticism of the decision to give former French Finance Minister Moscovici such a prominent economic post.

We have already pointed out in our full response to the new Commission that, contrary to popular belief (at least in some quarters in Germany), this does not necessarily change much – a lot of Eurozone rules are already set in stone. However, it is important to delve a bit more into who has what powers or controls which areas?

Katainen’s key responsibilities:

• Helping bring together an investment package to mobilise €300bn in additional public and private investment via the European Investment Bank within the next three months – expected to be discussed at tomorrow’s eurogroup meeting and unveiled soon.
• Coordinating the mid-term review of Europe 2020 strategy and long-term EU budget.
• Pushing economic policy coordination in line with view of “social market economy” while also pursuing a strong structural reform agenda.

Dombrovskis:

• Steering the ongoing reform of the Economic and Monetary Union and, importantly, in charge of pursuing the work of the four Presidents' report on creating a 'deep and genuine' EMU. This suggests he will play a significant role in the bid to create a sounder eurozone and finding a way to marry the existing currency union with greater political union. It's important to note that this will bring him into regular contact with Lord Hill who is responsible for banking union in the new Commission - exactly how the financial stability aspect and the eurozone prosperity aspect will fit together here will be interesting to watch.
• Formal oversight of the European semester – the mechanism through which budget rules are enforced in the eurozone. Also tasked with reviewing the mechanisms for achieving structural reform.

Moscovici:

• As might be expected there is significant overlap with those above. He has also been tasked with handling the European semester. It is expected he will handle the day to day evaluation and, in cooperation with others, will sign off on national budgets and reform plans.
• The language around the Stability and Growth Pact is also in line with previous thinking, tasking Moscovici with making “best possible use of the flexibility that is built into” the rules.
• The focus of this role seems to be on the macroeconomics and fiscal coordination of the eurozone. With that in mind, its expected Moscovici will attend eurogroup meetings on behalf of the Commission.

Overall then, while France may have got what it wished for, Moscovici looks firmly shackled to two fiscal conservatives. None of his tasks relating to the Eurozone are separated from these two VPs. More broadly, as the FT has pointed out, Moscovici (a French socialist) is also severely ideologically outnumbered not only within the broader Commission but specifically in the economic and financial posts.

Furthermore, the language used in the text of the letters remains quite Germanic and in line with the thinking of the current Commission:

“Combining growth-friendly fiscal consolidation, structural reforms and targeted support to investment will be key to a sustainable and strong recovery.”

“Sustainable growth cannot be built on ever-growing mountains of debt. We also know well that it is mainly companies that create jobs, not governments or EU institutions.”

There are also numerous mentions of “sound public finances” and the “social market economy” both core elements of the prevailing German economic thinking.

What to expect from the new Commission in terms of eurozone economic policy?

Finally, there are a couple of hints of what key proposals may be coming in the future. We have already mentioned the reference to a new investment package and the desire to push ahead with reviewing the current surveillance system. A further development seems to be for all those involved to try to engage a “broader range of actors at national level”, make the measures taken to improve the Eurozone more “socially legitimate” and find a more democratic alternative to the EU/IMF/ECB Troika. This suggests fostering national support for the likely continuation of significant structural reform and fiscal consolidation will be a key task for these Commissioners.

With that in mind, there is one final interesting line which is found in both Moscovici’s and Dombrovskis’ letter, they are tasked with forming:

“Proposals to encourage further structural reforms, possibly supported by financial incentives and a targeted fiscal capacity at Euro zone level”

This sounds eerily like a revival of the reform contracts, which Germany has been pushing for some time. The idea has been gaining ground once again after ECB President Mario Draghi suggested that structural reform should have similar oversight to that currently seen for national budgets. The latter part is also interesting, albeit very cryptic and vague. It could refer to the creation of a eurozone budget, possibly focused on tackling unemployment and related costs. Equally, it could refer to something along the lines of a wider assessment of the eurozone’s fiscal capacity and using it where there is scope to do so – meaning some kind of fiscal expansion in Germany (and other strong states) to offset fiscal contraction elsewhere.

Expect movement on these issues in coming months.

Grabbing a six-pack

Amid the ongoing Greek and eurozone debt crisis, MEPs and member states are trying to agree on a set of proposals for enhanced 'economic governance' in the eurozone. The aim: never again.

MEPs will vote on the proposals tomorrow, but it looks like they're not 100% satisfied with member states' offer and may therefore adopt only part of the compromise texts agreed with the Hungarian Presidency. According to UK Lib Dem MEP Sharon Bowles - who chairs the European Parliament's Economic and Monetary Affairs Committee - MEPs will "keep the door open to a final vote in July, so the Council can come back with an improved offer."

The whole discussion has been somewhat lost in the Greek saga, but here's our take. The proposal involves the so-called "six pack", which includes:

- New rules on how member states can plan and calculate their budget (including statistics and forecasts for budget planning, known as “budgetary frameworks”. This involves all EU member states, but the UK has an opt-out from “numerical fiscal rules”.

- Stronger surveillance of EU budgets, including sanctions on member states that manipulate statistics

- Stronger sanctions for member states that break the EU's budget rules (within the existing "Excessive Deficit Procedure"). All EU member states will be subject to the Commission's recommendations and warnings on their respective budgets, but the proposed sanctions are for eurozone countries only

- A “European Semester”, which involves member states making their budgets subject to “peer review” from the Commission and other member states. This involves all EU member states, but the UK’s different budget cycle is taken into account (meaning that Britain's pre-budget report is what will be peer reviewed which is public anyway)

- Rules to prevent and correct "macroeconomic imbalances "– this refers to the build up of massive current account deficits or surpluses and involves all EU member states, but stops short of detailing actual sanctions (there’s a specific proposal for that)

- A mechanism for imposing sanctions on countries running excessive macroeconomic imbalances. This applies to eurozone only

Let's look at two of the more contentious issues: will the UK be affected by the proposals and will these measures actually make a difference for the future of the eurozone?

First, Britain's involvement. The lastest proposal from the EP seems pretty harmless for the UK:

- Sanctions for breaches of EU budget rules and for excessive macroeconomic imbalances are for eurozone countries only;

- The European Parliament’s proposal to “leave the door open” for non-eurozone countries willing to sign up to the sanctions mechanisms has been scrapped in the latest compromise text;

- The UK’s different budgetary year is taken into account for the submission of budget guidelines, stability and convergence plans, etc.;

- Only the UK among non-eurozone countries benefits from a special opt-out on the country-specific “numerical fiscal rules” which member states must follow when they try to bring deficit below the SGP thresholds.

So what about the package as a whole? Well, it's not going to change the world. The two major proposals are:

Budget deficit rules and accompanied sanctions: The rationale here is to beef up the sanctions imposed on member states for ignoring the eurozone's fiscal rules. It's hard to argue against this on practical grounds. As we all know, the original Stability & Growth pact (SGP) was blatantly ignored (by Germany and France first) and Europe needs fiscal discipline. Will this new arrangement be any different? Much of the new arrangement is a mere copy of the SGP. However, under the new package sanctions could be imposed on eurozone countries at an earlier stage, if they ignore recommendations from the Council.

Macro-economic imbalances and accompanied sanctions: This is a tricky one. The principal is correct - fiscal discipline alone is not a sufficient solution to the eurozone crisis. The imbalances in the eurozone ultimately stem from huge competitiveness gaps between countries. But how in the world do you actually measure such imbalances - and more importantly, how do you make macroeconomic imbalances subject to pre-emptive or corrective sanctions.?For example, how do you penalise a country whose productivity falls for various reasons or whose economy suffers from a lack of diversity, which in turn stores up imbalances?

Of course, there's also the question of democratic legitimacy. Will electorates and national parliaments accept having some potentially important decisions on spending and tax being subject to supranational rules, rather than votes in elected popular chambers?

But another key question is, will these proposals actually do that much to stamp out the huge tensions and weaknesses we today see in the eurozone?

The answer is probably no.