As soon as he takes office as President of the European Commission, Durao Barroso - Portugal's former Prime Minister - should devote urgent attention to restoring order and focus to the European Union's economic policies.
The thickest file on his desk concerns the Lisbon agenda, an ambitious programme approved in 2000 by the EU heads of state and government with the goal of making the Union "the most competitive and dynamic knowledge economy" by 2010. All major fields of economic policy are covered: innovation and entrepreneurship, welfare reform and social inclusion, skills and employability, gender equality, labour and product market liberalisation, and "sustainable" development.
All of these are worthy goals, to be sure, but they belong intrinsically to the sphere of national political decisions. Indeed, under the European Treaties, the Union has no competence to enact legislation and policy in these domains, nor powers to enforce them.
But the European Council, spurred by the European Commission, invented a new policy approach - called "open coordination" - in order to impinge on these fields. Open coordination entails the definition of common goals at the EU level, voluntary compliance by the member states, and peer review of results within the European Council.
Inevitably, open coordination has failed to deliver on its promises. Moreover, the delusion that the European Council can somehow call growth and productivity into being has provided a diversion to national politicians who are unwilling to push for unpopular decisions back home.
My first suggestion to Barroso, therefore, is to scrap the Lisbon agenda. Only this will make it clear that responsibility for national economic performance lies with national policy-makers.
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This brings me to the subject of macroeconomic coordination at the EU level. The Maastricht Treaty envisaged a simple policy framework for economic and monetary union. Monetary policy was centralized and entrusted to an independent central bank, while fiscal policy was left to the member states. National governments were made subject - under the excessive-deficit procedure - to the twin constraints that fiscal deficits should not exceed 3% of GDP and government debt should remain below 60% of GDP (or at least tend towards that value).
Later on, the Stability and Growth Pact added a requirement that, over the medium term, government accounts should be "close to balance." Essentially, this aimed to prevent irresponsible budgetary policies after the euro's launch, while leaving sufficient room for cyclical oscillations of the deficit within the 3% limit.
The credibility of this apparatus was badly damaged by the November 2003 public controversy between the Commission and the Ecofin Council over the application of the excessive-deficit procedure to France and Germany. This does not mean that it should be abandoned.
On the contrary, a common external constraint on fiscal behavior is needed as a joint safeguard against an unsustainable accumulation of public debt that could affect financial stability and inflation throughout the EU - a risk aggravated by the impact of aging populations on pension systems. Such a constraint also provides a welcome anchor for domestic decision-making in member states with weaker political systems.
But the system needs to be reviewed. I would not listen to those who advocate excluding investment from fiscal deficits: this would only offer new incentives for creative accounting and unsustainable accumulation of debt. Instead, the emphasis should shift from annual deficits to debt sustainability.
The debt criterion, for example, could be supplemented by a limit on the (trend) growth rate of public spending, which would be kept below that of nominal GDP. The Commission's powers to initiate action when there is a risk of excessive deficits should be strengthened - provided, of course, that the Commission never again forgets that surveillance of national policies is a task that requires political judgment and cannot be left to accountants and lawyers.
Finally, top priority should be assigned to completing the Single European Market, in which the Union has powerful legal instruments to pry open markets and sustain competition. The best therapy for reinvigorating growth is both direct, by increasing competitive pressure, and indirect, by triggering the necessary adaptation in national employment, welfare, and education policies.
The job is far from finished. State aid to ailing companies remains ubiquitous, and common rules designed to ensure free circulation of goods and services are not fully respected by the member states - public procurement and energy markets being prime examples. Moreover, most markets for services - securities trading, wholesale and retail distribution, business services, and local utilities - remain sheltered from competition and free circulation rules. Empirical evidence indicates that these distortions in the market for services, which account for about two thirds of GDP, underlie most of the EU's productivity gap with the United States.
In recent years the European Council has not devoted sufficient attention to these tasks, which require full and continuing commitment by member states to transpose and implement Community directives. All too often, the Commission has favored enacting new legislation and creating new spending programs over the effective administration of what already exists.
So Barroso should forget the high-flying platitudes of the Lisbon agenda and focus instead on effective completion of the Single Market and keeping the member states' fiscal policies in order. Let national governments take responsibility for their countries' economic performance.
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As soon as he takes office as President of the European Commission, Durao Barroso - Portugal's former Prime Minister - should devote urgent attention to restoring order and focus to the European Union's economic policies.
The thickest file on his desk concerns the Lisbon agenda, an ambitious programme approved in 2000 by the EU heads of state and government with the goal of making the Union "the most competitive and dynamic knowledge economy" by 2010. All major fields of economic policy are covered: innovation and entrepreneurship, welfare reform and social inclusion, skills and employability, gender equality, labour and product market liberalisation, and "sustainable" development.
All of these are worthy goals, to be sure, but they belong intrinsically to the sphere of national political decisions. Indeed, under the European Treaties, the Union has no competence to enact legislation and policy in these domains, nor powers to enforce them.
But the European Council, spurred by the European Commission, invented a new policy approach - called "open coordination" - in order to impinge on these fields. Open coordination entails the definition of common goals at the EU level, voluntary compliance by the member states, and peer review of results within the European Council.
Inevitably, open coordination has failed to deliver on its promises. Moreover, the delusion that the European Council can somehow call growth and productivity into being has provided a diversion to national politicians who are unwilling to push for unpopular decisions back home.
My first suggestion to Barroso, therefore, is to scrap the Lisbon agenda. Only this will make it clear that responsibility for national economic performance lies with national policy-makers.
Subscribe to PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
This brings me to the subject of macroeconomic coordination at the EU level. The Maastricht Treaty envisaged a simple policy framework for economic and monetary union. Monetary policy was centralized and entrusted to an independent central bank, while fiscal policy was left to the member states. National governments were made subject - under the excessive-deficit procedure - to the twin constraints that fiscal deficits should not exceed 3% of GDP and government debt should remain below 60% of GDP (or at least tend towards that value).
Later on, the Stability and Growth Pact added a requirement that, over the medium term, government accounts should be "close to balance." Essentially, this aimed to prevent irresponsible budgetary policies after the euro's launch, while leaving sufficient room for cyclical oscillations of the deficit within the 3% limit.
The credibility of this apparatus was badly damaged by the November 2003 public controversy between the Commission and the Ecofin Council over the application of the excessive-deficit procedure to France and Germany. This does not mean that it should be abandoned.
On the contrary, a common external constraint on fiscal behavior is needed as a joint safeguard against an unsustainable accumulation of public debt that could affect financial stability and inflation throughout the EU - a risk aggravated by the impact of aging populations on pension systems. Such a constraint also provides a welcome anchor for domestic decision-making in member states with weaker political systems.
But the system needs to be reviewed. I would not listen to those who advocate excluding investment from fiscal deficits: this would only offer new incentives for creative accounting and unsustainable accumulation of debt. Instead, the emphasis should shift from annual deficits to debt sustainability.
The debt criterion, for example, could be supplemented by a limit on the (trend) growth rate of public spending, which would be kept below that of nominal GDP. The Commission's powers to initiate action when there is a risk of excessive deficits should be strengthened - provided, of course, that the Commission never again forgets that surveillance of national policies is a task that requires political judgment and cannot be left to accountants and lawyers.
Finally, top priority should be assigned to completing the Single European Market, in which the Union has powerful legal instruments to pry open markets and sustain competition. The best therapy for reinvigorating growth is both direct, by increasing competitive pressure, and indirect, by triggering the necessary adaptation in national employment, welfare, and education policies.
The job is far from finished. State aid to ailing companies remains ubiquitous, and common rules designed to ensure free circulation of goods and services are not fully respected by the member states - public procurement and energy markets being prime examples. Moreover, most markets for services - securities trading, wholesale and retail distribution, business services, and local utilities - remain sheltered from competition and free circulation rules. Empirical evidence indicates that these distortions in the market for services, which account for about two thirds of GDP, underlie most of the EU's productivity gap with the United States.
In recent years the European Council has not devoted sufficient attention to these tasks, which require full and continuing commitment by member states to transpose and implement Community directives. All too often, the Commission has favored enacting new legislation and creating new spending programs over the effective administration of what already exists.
So Barroso should forget the high-flying platitudes of the Lisbon agenda and focus instead on effective completion of the Single Market and keeping the member states' fiscal policies in order. Let national governments take responsibility for their countries' economic performance.