Euro group president Didier Reynders has a golden opportunity to push the long-discussed goal of European economic government.
By Tom Buerkle
July 2001
Institutional Investor Magazine
But will his outspoken ways foil his own campaign?
Belgian Finance Minister Didier Reynders has a seemingly simple idea. If 12 European Union countries can share a single currency and monetary policy, why not coordinate their fiscal policies more tightly? Reynders is determined to transform the euro group, an informal assembly of finance ministers from these nations over which he presides, into a true economic policymaking body - one that would review member countries’ budgets before they were introduced back home. Coercing the disparate EU countries into a single economic entity can, he believes, turn Euroland’s sputtering economy into a dynamo.
A bold vision, but try selling it to Charlie McCreevy. The Irish finance minister oversees the euro area’s fastest-growing economy and largest budget surplus. Thus he was taken aback when he received a reprimand from the European Commission, the EU’s executive agency, earlier this year for cutting taxes at a time of 5.3 percent inflation. So despite endorsing the EU’s broad economic policy guidelines at the June meeting of finance ministers, McCreevy flatly rejected the guidelines’ recommendation that Ireland adopt “countervailing budget measures” - read tax increases or spending cuts - to curb in-flation. And the blunt-spoken McCreevy was equally dismissive of Reynders’s push for advance budget consultations in the euro group.
“Mr. Reynders is a great man for talking outside about those things,” he told Institutional Investor. “Does he say them inside? I never heard him say anything like that. I must be going deaf.”
Welcome to the fractious state of Euroland. Reynders’s ambition of forging a more coherent economic policy structure for the euro area is an old theme that is gaining new support today as governments struggle to come up with answers to the euro’s persistent weakness and a sharp slowdown in growth. But it remains a highly provocative vision that threatens the delicate balance between European unity and national prerogative, the fundamental dilemma that has raised hackles since Jean Monnet’s day. And Reynders has complicated his own task immeasurably by showing disdain for diplomatic niceties in his urgency to implement his ideas.
In one typical incident, Reynders embroiled himself in a public war of words with Wim Duisenberg, the president of the European Central Bank, after the ECB snubbed the minister’s blatant appeal for lower interest rates. Prime Minister Jean-Claude Juncker of Luxembourg, the doyen of the euro group, dressed down Reynders at a ministers’ meeting, according to officials present. Duisenberg, too, weighed in with his own thinly veiled criticism of the finance minister. Reynders, characteristically, remains unapologetic.
Reynders’s contention is that closer cooperation among EU governments within the euro group would compel them to adopt more disciplined and better-coordinated fiscal policies, thereby complementing the unified monetary policy conducted by the ECB. The regime, which would rely on peer pressure and moral suasion rather than rigid rules, would function like a prevention system; euro group ministers would influence member countries’ fiscal programs early on so that the euro-area economy wouldn’t be infected by imprudent behavior in any one country. This, Reynders tells II, is “a development that’s going to become part of the euro group’s setup.”
Such benign economic oversight is especially critical at a time like this, when the euro continues to languish and the European economy is faltering, argues the 42-year-old minister. In a speech in Brussels in mid-June, he asserted: “I am convinced that financial market operators have the impression that the economic policy of the euro zone is confused, badly coordinated and hamstrung by conflicts between monetary and political authorities. This is an image that must be corrected.”
Fostering closer coordination of fiscal policies isn’t all that’s on Reynders’s agenda. In his 12-month rotating stint as president of the euro group, he has set forth an ambitious program that includes expanding the euro group’s remit by taking up labor market reforms - another area where differences of opinion tend to be sharp. He also plans to discuss the need for reform of Europe’s pay-as-you-go pension programs, a hot-button topic if ever there was one. These overarching issues were previously discussed only when the EU’s noneuro countries - Britain, Denmark and Sweden - were present.
Reynders is also waging a campaign for the euro group to develop an ongoing policy dialogue with the ECB about the euro-zone economy. The aim, he emphasizes, is not to exert political control over the bank but to create a European equivalent of the weekly breakfast meetings between U.S. Federal Reserve Board chairman Alan Greenspan and U.S. Treasury Secretary Paul O’Neill. “There is a difference between an exchange of views,” he says, “and influence against the independence of the ECB. We must be able to organize a good policy mix.”
Reynders may lack a certain politesse in pushing his proposals, but these are issues that aren’t going to go away when his brief euro group presidency expires in December. Many of Reynders’s ideas have broad support: French Prime Minister Lionel Jospin and European Commission President Romano Prodi have both outlined their own visions of economic government for the EU in recent months. And the impetus toward more coordination of European budgets has gained strength from the depressed euro, weaker economic growth and the prospect of additional EU members.
Can Reynders, who will gain even more power and visibility this month when Belgium assumes the EU presidency, seize the opportunity to tie together European economies more closely? Or will the manner that so annoyed Juncker, Duisenberg and McCreevy set back his efforts, delaying even further European economic integration?
Closer economic ties have rarely seemed so important to Europe. Governments are scrambling for answers to the euro’s troubling decline. On its first day of trading, January 4, 1999, the euro hit a high of just over $1.18 amid a wave of optimism that it might one day rival the dollar as a reserve currency and attract huge investment flows to Europe. Since then it has been mostly downhill. Despite coordinated intervention by the ECB, the Federal Reserve and other central banks last October and a sagging U.S. economy, the euro was trading last month at 85 cents, not far above its all-time low of 82.25 cents.
European policymakers, says Jim O’Neill, currency strategist at Goldman Sachs International in London, “are bothered by the constant harping on about the weakness of the euro, and they hear that it’s because they don’t have a proper coordinated response to things.”
Every bit as disquieting as the travails of the euro has been the speed with which European economic growth has lost momentum. As late as May, European policymakers were insisting that euro-zone growth would be about 3 percent this year. By late June the ECB had reduced its forecast to about 2.5 percent. Most private analysts say it will be closer to 2 percent. Germany’s growth rate slowed to less than 2 percent in the first quarter and may have contracted in the second quarter, say some economists. Unemployment is rising in both Germany and France.
The slowdown in the European economy is expected to make it harder for individual countries to adhere to the EU’s broad economic guidelines. Reynders and the European Commission last month called on EU members to maintain budgetary rigor even as growth weakens. In its June bulletin the ECB issued a blunt warning about the risks posed by the downturn. “For countries with significant deficits,” it said, singling out France, Germany, Italy and Portugal, “this might undermine the credibility of their determination to achieve sound budgetary positions as required by the Stability and Growth Pact.”
Mounting concerns about an underachieving currency and heightened budget problems should in theory strengthen the hand of advocates of closer economic cooperation, like Reynders. “First of all, we must maintain fiscal consolidation,” he says. “We must have a good control of expenditure.”
Such control is difficult, however, when EU rules don’t allow finance ministers to take collective action to enforce discipline unless a member country’s deficit exceeds 3 percent of its GDP.
Europe’s current economic malaise aside, another reason to forge ahead with an initiative like Reynders’s is that the EU is soon to get bigger - and harder to manage. At their summit meeting in Göteborg, Sweden, last month, EU leaders set a target date of 2004 for admitting the first of as many as 12 new members from Eastern and Southern Europe. Both Jospin and Prodi offered their proposals for tighter economic coordination as part of a broader debate about how to govern the new, expanded EU - a debate that must be resolved over the next three years if enlargement is to proceed.
Many of the EU’s broader economic goals ostensibly stand to benefit from a stronger euro group. The EU’s Lisbon Strategy, a ten-year plan adopted at last year’s meeting in the Portuguese capital, has the ambitious goal of transforming the euro area into the world’s leading high-tech economy. The success of the plan hinges on governments’ achieving a variety of targets ranging from higher employment rates and education standards to liberalizing energy markets and completing a single EU capital market. “The entirety of this process is based on peer pressure,” says Alison Cottrell, a senior European policy analyst at UBS Warburg. “These guys have to be able to deal with each other.”
The ECB, ever sensitive to any limitations on its independence, seems amenable to some form of arm’s-length policy discussion with an EU fiscal counterpart. The ECB regularly attends euro group meetings, and Christian Noyer, the ECB’s vice president, describes himself as “extremely relaxed” about talk of economic government and closer dialogue. But he draws the line at any hint of ex-ante cooperation, in which finance ministers might commit themselves to budgetary restraint in exchange for the promise of monetary easing. If such offers are ever made, “we will simply not listen to them,” Noyer says.
Reynders’s desire for a dialogue with the central bank is widely shared among his fellow ministers. “The bank has to know what the intentions of ministers are when they are drawing up their budgets,” says Luxembourg’s Juncker. “And ministers have to know what kind of monetary reaction this can have.”
Reynders will have a more substantial platform for capitalizing on the growing enthusiasm for tighter coordination when Belgium, under Prime Minister Guy Verhofstadt, takes over the EU presidency for six months beginning this month. Reynders will not only continue to head the euro group for that period but will also set the agenda for meetings of all 15 EU finance ministers.
Still, in trying to advance European economic government, Reynders is tackling an issue that has divided EU countries for more than a decade. The U.K. and France helped scuttle broader political ties early in the negotiations that led to the historic Maastricht Treaty of 1992. Then in 1997 France’s Jospin came to power, promising to create a political counterpart to the European Central Bank, only to watch as adamant German resistance took most of the wind out of his sails. In turn, just this past February Jospin helped defeat European Commission President Prodi’s bid for closer budgetary cooperation among EU members.
Although virtually all the ministers support broader cooperation in concept, the specifics present a problem. For instance, Jospin and Prodi have each sketched far-reaching proposals for an embryonic economic government for the euro area under which participating nations would pool much more of their policymaking authority. They differ on significant details, however.
Prodi, a staunch euro advocate who, as Italy’s prime minister in the late 1990s, guided the country into the single currency, wants closer collaboration in drafting national budgets and deregulating labor markets. “All this is important, because without continuous convergence and integration, the large market [the EU’s single market] will break up and the euro will be unable to play the global role we have planned for it,” he said in a recent speech in Paris.
While Prodi backs deregulated labor markets in which companies would have greater power to hire and fire employees, Jospin is pursuing almost the opposite tack. His Socialist government just passed fresh job protection legislation following a wave of corporate restructuring. Moreover, Jospin wants greater harmonization of corporate tax rates so that countries can’t poach companies and jobs from one another in what he terms “fiscal dumping.” Jospin has also proposed a new European fund to help countries buffeted by “global economic turbulence.”
Then there’s Ireland’s McCreevy, who would prefer something closer to the status quo: Individual countries minding their own budgets while cooperating with fellow EU members to meet broad guidelines.
Reynders shares many of France’s long- term ambitions for EU economic government, including more harmonization of tax rates and protective employment legislation. He has even promised to submit a proposal by the end of this year for a new EU-wide tax, something the Union has never had, to fund its budget and alleviate the annual haggling over national contributions.
Unlike Jospin, however, Reynders would like the European Commission to play a greater role in economic policymaking. He regards the agency as an effective defender of the interests of small nations against large.
Although it’s unlikely Reynders will be able to do more than lay the groundwork for a European economic government in his remaining six months, he has shown he can move at lightning speed. Trained as a lawyer, he was appointed to the board of the Belgian railway, Société Nationale des Chemins de fer Belges, in 1985 at the age of 26 and named chairman the following year. He also served as chairman of Belgium’s national airline, Sabena, for two years in the early 1990s.
Reynders’s political reputation rests on his meteoric ascent in the Liberal party of Belgium’s French-speaking region of Wallonia. He helped establish the Liberals as a serious political force in his hometown of Liège when the dominant Socialist party became enmeshed in a series of scandals, including the still-unsolved murder of former deputy prime minister Andre Cools in 1991.
In 1995 Reynders was named head of the Liberal bloc in the Chamber of Representatives, the lower house of Parliament, and then became finance minister when the Liberals swept to power in 1999 at the head of a coalition. Both as finance minister and in previous political posts, Reynders is credited with helping revive Belgium’s debt-ridden economy by advocating spending restraint and tax cuts.
Still, his in-front-of-open-microphones rather than behind-closed-doors style of diplomacy hasn’t endeared him to many European leaders. His call in April for the ECB to “assume its responsibilities” and cut interest rates angered several ministers, who believed that such naked political pressure caused the central bank to dig in its heels and delay a cut by one month just to assert its autonomy. The incident was what prompted Juncker’s rebuke at the finance ministers’ meeting in Malmö, Sweden, in April.
The episode highlighted the risk of bringing divisions among Europe’s finance ministers out into the open while pursuing closer EU ties. Austrian Finance Minister Karl-Heinz Gasser seconded Reynders’s call for a rate cut, but Spain’s minister, Rodrigo Rato, said he supported the ECB in keeping rates steady.
The incident also irritated ECB president Duisenberg, with whom Reynders supposedly wants to create a dialogue. Duisenberg, whose disdain for ministerial interference is well known, chided Reynders during an appearance before the European Parliament’s Economic and Monetary Affairs Committee in May. Referring to the Malmö debacle, he snipped: “It remains to be seen to what extent the euro group president of the time can always speak on behalf of his 11 colleagues in the euro group. But that is his problem, not mine.” At the next euro group meeting in Luxembourg in June, Reynders stated that he “regretted” not being able to talk face-to-face with Duisenberg, who skipped the meeting and sent ECB vice president Noyer instead.
The squabble was mild by European standards, but coinciding with the euro’s slide toward 85 cents, it left ministers and central bankers alike uneasy. The back-and-forth between Duisenberg and Reynders amounted to “tit for tat,” says one national central banker. “Look, it starts to be ridiculous. The whole thing leads to a kind of malaise. This is not good.” French and German officials also criticized Reynders for his megaphone diplomacy. “He talks too much,” one German official says. “I don’t think many people in Berlin take him seriously.”
Reynders is hardly apologetic, insisting that both sides in the policy dialogue should be free to speak their minds. “It’s the same kind of thing when the ECB says there’s a need for structural reform,” he says. “Is that pressure on the euro group?”
Whether Reynders’s interest rate call was right or wrong, some economic leaders felt it carried unnecessary risks. The ECB is likely to question finance ministers closely about their commitment to budgetary restraint and structural reform if euro-zone growth slows below 2 percent this year, a national central banker says. “If the answer is yes, and if the ECB believes it, then they may lower rates faster than they would” otherwise, this banker says.
Given the economic challenge European countries are facing, some officials would prefer to focus on practical, near-term issues rather than have to deal with longer-term, more abstract concepts like EU economic government. France and Germany are lagging behind the euro group’s goal of achieving budgets at or near balance, thus limiting their ability to tolerate a rise in deficits if the European economy continues to turn down.
“This debate about economic government is really distracting from what is possible at European level, and what has to be done at national level,” a senior EU official says. “A lot of us would be happy if we could at least get automatic stabilizers back to work” - even if it means higher deficits - to spur growth.
Although Reynders wants the euro group to be ready to exert strong pressure to clamp down on public spending that would cause wider deficits if the current slowdown worsens, he does seem attuned to the practical effects. He’s equally adamant that governments maintain their tax-cutting programs to spur growth. “It’s important on the psychological side to maintain the tax cuts for confidence,” he says.
Still, some economists are skeptical about whether closer EU economic ties are warranted. Daniel Gros, director of the Centre for European Policy Studies in Brussels, believes closer budgetary cooperation is unnecessary as long as euro countries respect the Stability and Growth Pact’s deficit limits. Basic macroeconomic forces will address some of these problems, he says. The impact of, say, German tax cuts on demand in France would be offset by the consequent upward pressure those cuts would put on euro-zone interest rates, Gros contends. Higher interest rates would thus mitigate the stimulation prompted by a tax cut.
Closer coordination might also entice ministers to ease economic targets for everyone, suggests Francesco Giavazzi, an economics professor at Bocconi University in Milan. He worries that “there is less of a stigma” if the whole group acts in concert to give themselves an easier target to meet. At present, a country can be singled out for criticism if it doesn’t comply with the guidelines.
A telling barometer of euro group solidarity and progress on Reynders’s economic prevention system will arrive shortly. At the June euro group meeting, Reynders characteristically wasted little time in calling on the new Italian government of Silvio Berlusconi to discuss its budgetary ideas within the euro group before putting any proposals before Parliament in Rome.
That could be a tall order for Berlusconi, who was elected partly on the promise of tax cuts. What’s more, he has inherited a budget deficit that is widening to more than 1 percent of GDP, above Italy’s EU target for this year of 0.8 percent. Speaking before the election, Giulio Tremonti, Berlusconi’s new finance minister, would say only that the government would meet its EU obligations. Since the election neither Berlusconi or Tremonti has offered any details on how Italy would get back on track.
In mid-June a spokesman for Reynders said the Italians had not responded to his invitation for advance budget consultations, but the euro group president believed Tremonti would discuss the issue at the next meetings, scheduled for July 9. The outcome will be important. “If the Italian program were to disappoint markets, and it was perceived that the euro group didn’t want or, worse, was incapable of dealing with this, it would be a big negative for the euro,” says UBS analyst Cottrell. And no doubt for Reynders as well.
