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.

Handelsblatt: France is the new sick man of Europe

The front page of Germany financial daily Handelsblatt today depicts France as the sick man of Europe, warning that "a once proud nation faces economic decline." Of course warnings of French decline have been made before - notably the famous ticking baguette bomb on the front page of the Economist a couple of years ago - but it is striking that the German press is increasingly reflecting these concerns.

The front page trails a detailed eight page feature which the paper introduces by arguing that:

"Our most important neighbour is mired in crisis. France risks falling behind when it comes to its budget, its labour market and its industry. However, the country could be successful if only it stops making itself smaller."

The timing might be slightly ironic given that the French economy 'outperformed' the German economy in the last quarter - albeit by staying flat as Germany contracted by 0.2%. Handelsblatt has itself warned that Germany was "no longer a champion" but the German economy is still pretty robust, and should bounce back quickly, while France's problems are much more deeply entrenched.

Is Juncker saddling up to take on the EU's red tape dragon?

In an interview with Bild am Sonntag, European Commission President-designate Jean-Claude Juncker argued that:

“It is right that there are concerns [among EU citizens] that the EU is interfering in things that are not its concern… for this reason, I’ll create a European Commissioner for cutting bureaucracy.”

This is a welcome suggestion - we floated a similar idea back in our "EU localism" report back in 2011, and the Dutch subsidiarity review also recommended a 'subsidiarity commissioner'. Of course Juncker is not be the first person to say they wish to EU cut red tape and he will most likely not be the last. However, this is an encouraging sign, and suggests that he is not totally deaf to the concerns of business and citizens.

To make the idea more than symbolic, Juncker will need to do more than create a new post. The new Commissioner will need to be able to reach across the EU Commission's many departments and force other Commissioners to move forward with scrapping redundant laws. Specific tools could include the imposition of sunset clauses into new legislation and the right to demand updated impact assessments for existing regulations (UK government impact assessments often projected benefits which failed to materialise). For all this to take place, there will need to be a cultural shift in the Commission.

If this is a genuine attempt to de-regulate, Juncker will be able to count on support from UK, Scandinavian, Central and Eastern and Dutch governments. However, Juncker himself has also talked up the need for the EU to be more involved in social policy so it remains to be seen how strong his commitment to de-regulation will actually be.

So this is a welcome idea but one that needs full support and back-up across the EU in order to fly.