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EU Is Recovering but the Commission Has Doubts There Is Political Will

Published on , , Twitter: @euinside

So far the crisis has been the main driver of reforms in the EU at large and in the member states separately, but from now on there is a serious risk that there will not be political will to continue with them. This is one of the main messages in this year's country-specific recommendations (CSR). That message is accompanied also by several very serious warnings. One is that the EU is facing a significant demographic change, which will have a huge impact on public finances. Another is that the Union's economies' competitiveness is directly dependent on natural resources. And a third warning is that global developments require the EU to constantly adapt.

Generally, the Commission believes, the new economic governance of the EU is working well, but the biggest challenge remains political. Solid results can be achieved only if political will and readiness remain firm. "Somewhat paradoxically, this proves easier in crisis times, when alternatives are scarce, but the lack of pro-active decision in better times is often the cause of future difficulties", says the Commission's analysis. This year's analysis is different than previous years because it appears in a critical moment. On the one hand, there is no doubt that there is economic recovery, although it is still slow and uneven. On the other hand, the Union has reached a critical point in its evolution and it has to decide how to continue its development in the future.

Last but not least, the recommendations have been published in the peak of the, we can call it, existential issue who should be the next European Commission chief and what should be the Commission's mandate for the next five years. This is important because many political leaders in EU have read the outcome from the European elections as resistance against the austerity measures, but on the other hand the European People's Party, which supports fiscal discipline, is again the biggest political group in the European Parliament, although it has registered a significant retreat from its previous positions. Precisely because of this context, it is very important the CSR to be read by everyone in EU in their entirety, not only country-by-country.

EU's economies from a bird eye's view

The crisis has left Europe divided economically and socially which is why the priorities of the member states differ significantly is another very important conclusion in this year's CSRs. Nonetheless, there is no doubt at all that the interconnectedness between the economies is huge which requires to work more on their convergence and on EU's convergence with the best performers in the world. This, by the way, is a very important message to the eurosceptic and anti-European forces who believe that restoring national sovereignty would deliver the desired success. Moreover, the Commission's message for more "togetherness" is sent mostly to the euro area. "It is important that the Euro area, as a whole, now moves beyond looking at the recommendations addressed to its members separately, and focuses
increasingly on the cross-cutting elements identified collectively
".

By next year, the EU's economies are expected to start growing again. This is already a fact in almost all of them, excluding Croatia and Cyprus. The problem is that growth is still too slow and does not suffice to catch up the lost years in the crisis. In the Commission's philosophy still dominating is the perception that the level of public debt is directly related to the economy's potential to grow and if Jean-Claude Juncker is elected chief this philosophy will be maintained, moreover that the arguments for it are very strong. The Commission's analysis shows that, generally, the government deficits have started to fall since 2011, but the level and quality of adjustment differ significantly. Adjustment had a focus on the spending part of the budget in Ireland, Greece, Lithuania and Portugal, while countries like France, The Netherlands, Italy and Finland relied mainly on tax increases. Something which the Commission firmly rejects as an approach.

In the past year, there is an improvement of the overall fiscal picture which has led to a decline of public debt servicing interest rates. However, it continues to grow and will peak this year in the EU and the euro area. What is frightening is that it remains above 100 per cent in Belgium, Ireland, Greece, Spain, Italy, Cyprus and Portugal. This is precisely why it is crucial to be put under control and to start falling, especially against the backdrop of the demographic picture in Europe. The latter is a very important remark because the Commission points to many member states (more than half) the need of a serious reform of their pension systems because of irrefutable data about ageing of the population which will exert serious pressure on public finances. That is why reforms need to be directed toward increasing retirement age and abolishing privileges for early retirement.

In the past years, 23 member states have begun increasing retirement age as in many of them this was accompanied by equalisation between men and women. The problem is, however, that most of the "easy" measures have been exhausted and it is necessary to do more to close the potential gap in funding expenditure for pensions in the future, the Commission believes. That is why, several member states are recommended to improve the link between mandatory retirement age and life expectancy.

The Commission pays big attention also to the member states' tax policies pointing out that taxing labour is still very high in the EU compared to the other countries from the OECD. The high labour taxation has led, the Commission says, to multinational corporations circumventing it. They apply tax planning strategies in order to reduce globally their tax burden by taking advantage of the technical peculiarities and differences of the tax systems in the EU. The trans-border dimension of many of the structures for tax planning and the increased mobility of capital make the fight against aggressive tax planning difficult for the individual tax systems.

That is why, it is necessary the member states to urgently pay attention individually and at European level on this issue because such corporative behaviour leads to erosion of tax bases in the countries that already experience fiscal hardship. Some member states in particular should pay attention on the sustainability of tax revenues pending European and international efforts to solve the problem with tax base erosion and profit-shifting. The Commission believes that the tax conventions need to be reviewed and the mechanisms to prevent abuse strengthened.

A big problem is also the expansion of divergences in terms of innovation. Some countries, like Sweden, Germany, Denmark and Finland, are excellent performers, while others demonstrate deterioration. Those are the United Kingdom, Poland, the Czech Republic, Hungary, Portugal, Romania, Greece, Bulgaria and Malta. In four countries encouraging catch-up measures have been undertaken - Latvia, Slovakia, Lithuania and Estonia. The Commission also notes that in spite of the recommendations, many member states, notably Bulgaria, Italy, Slovakia and Romania, have reduced their spending for education in the past years. Securing appropriate conditions for education is necessary to "absorb" the young students in times of increased influx to the high education as a result of the reduced possibilities for early entry on the labour market because of the crisis. It is very important, the Commission says, the education and training systems to contribute for improvement of the opportunities of older workers.

The Commission is focusing also on energy dependency and on investments in infrastructure, research and human capital. Unemployment is a serious problem not only in the context of the countries where it is huge. This will continue to be a factor for the economic divergences between the member states and, therefore, for tensions in terms of mobility. Still, in many countries, especially those most affected by the crisis, crediting, most notably for small and medium-sized enterprises, is limited. A problem is also the fragmentation of financial markets and that many EU summits were dedicated on completing the single market, but implementation of decisions is disappointing.

Do not take the data about growth for granted

The European Commission's main conclusion in this year's recommendations is that, although the overall economic picture is improving, growth is uneven and fragile which means that structural reforms have to continue, especially bearing in mind that in the long-term the EU's potential for growth will be relatively low. This is a very important conclusions from the point of view of the reforms that are being planned in the Union. Without specifically talking about any need of reforms of the EU, the Commission points out that the biggest challenge in the coming years will be political. The member states have undertaken fiscal consolidation and structural reforms where this was necessary. However, this is true mainly for the programme countries. In the rest, the pace of necessary changes is very slow and more timid than needed.

And while, on the one hand, in many member states it could be heard during the European elections that Brussels dictates to the member states what to do, the Commission's analysis shows the opposite, moreover it is not the first time - that the member states agree about the need of reforms, but then they do not implement them because this is hard to sell to voters (after Jean-Claude Juncker). "With these recommendations, the Commission is pointing the way forward. We believe that Member States must now play their part in seeing these reforms through, even if we know that sometimes they are politically unpopular. There are reforms to do at national level, and there are decisions that we can take and implement at European level", said ambiguously the European Commission chief, Jose Manuel Barroso when presenting the recommendations.

Later this month, the leaders of the 28 are expected to draw their long-term vision about the evolution of the EU. The CSR and the Commission's analysis as a whole and for the euro area in particular can serve as a very good foundation for deliberations. To this should also be added the European Central Bank's role during the crisis and especially its monetary policy which is a topic of debate of the big financial experts globally. One of the biggest challenges the common currency is facing is low inflation which has continued for too long now and is creating risks of a new crisis. So, the leaders of the member states will do good if they stop focusing in the trees thus not seeing the forest. The debate about who should head the next European Commission is important for many reasons, but is not the most important one. It is much more important to realise that the crisis is far from over and to answer the question "Why?".

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