Thursday, April 24, 2014
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Europe’s Competitiveness Shell Game

BRUSSELS – For seasoned observers of Europe’s economy, the most recent European Union summit delivered a bizarre sense of déjà vu. Little more than a decade ago, European leaders announced to great fanfare the “Lisbon Agenda,” a policy blueprint to make Europe “the most competitive, knowledge-based economy in the world.” The new “Competitiveness Pact,” proposed at the EU summit by France and Germany, did not make the same pretensions to global grandeur, but was instead sold as a step required to ensure the survival of the euro.

With the exception of what appears to be a covert effort to force EU countries to raise corporate taxes to French and German levels, there is ostensibly nothing unreasonable in the Competitiveness Pact. Raising the retirement age to 67, abolishing wage indexation, and compelling countries to enshrine a debt brake in their national constitutions are reasonable measures to enhance competitiveness and restore confidence in the euro.

Unfortunately, however, government leaders have apparently learned nothing from the lessons of the failed Lisbon Agenda. Indeed, the current plans seem doomed to fail for two reasons.

First, a credible policy agenda needs firm targets with clear deadlines. But, notwithstanding their leadership pose vis-à-vis the Competitiveness Pact, the French have already distanced themselves from the commitment to raise the retirement age to 67. According to Bloomberg, a French official told reporters at the summit that there was no question of that after the retirement age was lifted to 62 from 60 last year. Given the huge public protests sparked by that move, the official’s statement seems eminently believable.

The likely outcome – in typical European, consensus-driven fashion – will be to forgo deadlines and concrete targets in favor of an ambiguous, open-ended pledge to undertake further pension reform. Similar exceptions will probably be made for other countries that cannot reconcile aspects of the new pact with their national circumstances. Belgium, for example, insists on its system of automatic wage indexing. After every country has received its “opt-out,” and the Competitiveness Pact’s targets have been sufficiently diluted to ensure its passage, there will most likely be very little of substance left.

Second, targets need to be not only specific, but also binding. Sanctions for non-compliance must be enforced – without political meddling. One of the most important lessons of the Lisbon Agenda is that the so-called Open Method of Coordination – a harmless peer-review procedure without repercussions for non-performance – is clearly the wrong approach to kick-starting national-level reforms.

But even where the European Commission had the legislative tools and political mandate to impose sanctions – for example, to punish non-compliance with the Stability and Growth Pact – member states managed to avoid punishment by “reforming” the requirements. Indeed, Germany and France spearheaded the effort to make the Stability and Growth Pact more “flexible” when they could no longer comply with its 3%-of-GDP fiscal-deficit ceiling.

It is this history that makes the current moves to sideline the European Commission in enforcing the Competitiveness Pact suspicious. Organized purely as an intergovernmental policy program, the pact cannot work, because EU member states cannot be trusted to monitor their own performance and enforce sanctions on their peers – or on themselves.

Such a system would be the political equivalent of letting the inmates guard the prison. In fact, the Competitiveness Pact’s failure even to mention the Europe 2020 strategy, which EU leaders enacted less than a year ago as a blueprint for economic development, reinforces the impression of uncoordinated, ad hoc, and downright erratic policymaking that is heavy on theatrics and light on implementation.

The lack of consensus on basic features of an economic framework – be it a retirement age commensurate with Europe’s demographic outlook or a legislative commitment to budgetary discipline – makes one wonder how eurozone countries could enter a monetary union in the first place. That question is in the past, of course, but publicly demonstrating the eurozone’s arrested convergence is bound to undermine confidence in the common currency further – and at a most unfortunate moment.

Just as financial markets seem to have calmed, European leaders have once again raised expectations of a major policy move – only to see yet another summit devolve into squabbling. It is hard to imagine how Europe’s policy differences can be overcome by the leaders’ self-imposed March deadline, when the next summit will take place.

One thing is certain: it will require a lot more than a warmed-over Lisbon Agenda, with easy targets and toothless enforcement, to restore confidence in the euro and safeguard the monetary union.

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