Euro Plus Pact
The Euro Plus Pact, also initially called the Competitiveness Pact or later the Pact for the Euro[1], is a recent plan in which member countries make concrete commitments to a list of political reforms which are intended to improve the fiscal strength of the country. The plan is advocated by the French and German governments for more widespread adoption by other Eurozone countries. As such it is designed as a more stringent successor to the Stability and Growth Pact, which has not been implemented consistently. The pact has been controversial not only because of the the closed way in which has been developed but also for the goals that it postulates.
Euro Plus Pact
The Euro Pact Plus came with four broad strategic goals along with more specific strategies for addressing these goals. The four goals are:
- fostering competitiveness
- fostering employment
- contributing to the sustainability of public finances
- reinforcing financial stability.
These goals are intended to be addressed by all member countries of the pact, unless a Member State can "show that action is not needed" in this area. While the pact comes with specific strategies these are not seen as compulsory, specifically the pact states:
"The choice of the specific policy actions necessary to achieve the common objectives remains the responsibility of each country, but particular attention will be paid to the set of possible measures mentioned below."
The aims and strategies of the pact are to updated yearly with the following procedure.
"...each year participating Member States will agree at the highest level on a set of concrete actions to be achieved within 12 months."
Competitiveness
This are of the pact is the same as addressed in Abolishing Wage Indexation. It will be evaluated by the national Unit Labour Cost(ULC) a quantitative measure of wage costs, and is to be addressed by both reducing the cost of labour as well as increasing productivity. Labour costs are to be reduced by reforming the "degree of centralisation in the bargaining process", the "indexation mechanisms" as well as decreasing wages in the public sector. Productivity is to be increased by deregulating industries as well as improving infrastructure and education.
Employment
The goal will be evaluated by quantitative measures of long term and youth unemployment rates, and labour participation rates. This aim is to be achieved by promoting the “flexicurity” model as well as a "lowering taxes on labour" and "taking measures to facilitate the participation of second earners in the work force".
Public Finances
Indicated as being the most important aim of the pact this objective is to be addressed by increasing the "sustainability of pensions, health care and social benefits" as well as implementing "national fiscal rules." Increasing the sustainability of pensions, health care and social benefits means limiting the liability of the government to a more manageable level, this will be done by "limiting early retirement ... in the age tranche above 55" as well as implementing "schemes and using targeted incentives to employ older workers" reducing the burden on pension systems.
One of the most stringent conditions of the pact is given with respect to fiscal rules:
"Participating Member States commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation."
When implementing this rule "Member States will retain the choice of the specific national legal vehicle to be used" provided that it has a "sufficiently strong binding" condition and a "durable nature." The pact recommends a constitutional amendment or framework law that is formulated as either a "debt brake, rule related to the primary balance or an expenditure rule." Additional it should should "ensure fiscal discipline at both national and sub-national levels" in case these have autonomy to issue debt or other liabilities.
Financial Stability
The Financial stability will be measured quantitatively with respect to the "level of private debt for banks, households and non-financial firms." With assistance from the President of the ESRB countries are expected to put into place "national legislation" to resolve these in case they exceed benchmark levels.
Participation as of March 25
The proposal for economic measures and cooperation adopted on 25 March 2011 by the European Council includes as participants without any caveats the Eurozone member states, Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania.[2]
| Participating | Participating | Abstaining |
|---|---|---|
| Eurozone) | Non-Eurozone | Non-Eurozone |
| Austria | Denmark* | United Kingdom |
| Belgium | Poland | Sweden |
| Estonia | Latvia | Hungary |
| Finland | Lithuania | Czech Republic |
| France | Bulgaria | |
| Germany | Romania | |
| Greece | Malta** | |
| Ireland | Cyprus** | |
| Italy | ||
| Luxembourg | ||
| Netherlands | ||
| Portugal | ||
| Slovakia | ||
| Slovenia | ||
| Spain |
Notes:
'* Member of the pact under the original name of "Competitiveness Pact."
'** Members of the pact with the caveat of no commitment to no tax harmonization.
The Original Plan: The Competitiveness Pact
The original plan called for six policy changes to be set[4] as well as for a monitoring system to be implemented to ensure progress. The six objectives are: abolishing wage indexation, raising pension ages, creating a common base for corporate tax and adopting debt brakes. In the following sections the motivation for and criticism of each objective is summarized.
Abolishing Wage Indexation
Wage indexation is the process of adjusting wages to compensate for inflation, which reduces the value of money over time. Abolish indexation would allow for real wages to decrease increasing the competitiveness of countries as it becomes less expensive to employ people. Understandably this policy objective has been called into question by some governments such as Belgium as it reduces people's purchasing power [citation needed].
Raising Pension Ages
In countries with "pay as you go" pension systems, as most European countries have, raising pension ages has a very profound impact on government revenue as people who continue working will also pay taxes instead of requiring them. This too is a controversial proposal as can be seen in the strikes in protest of France raising its pension age in 2010.
Creating a Common Base for Corporate Taxes
Creating a "common base" means unifying tax rates, this has been opposed by countries such as Ireland, which have low corporate tax rates.
Adopting debt brakes
The word "debt brake" comes from the German "Schuldenbremse", an amendment to the constitution legally limiting the size of sovereign debt countries are allowed to run. These have been implemented in Switzerland in 2003 and in Germany in 2010[5]. Debt breaks can vary in strictness and details of the intended implementation are not yet clear, but the motivation for this rule is to create a legally binding policy instead of the current budget guidelines on deficits which have been not been implemented by member countries.
Criticism
The plan has been criticised for impinging on the sovereignty of countries due to its authority to set policy in areas that were previously under the national. The reforms that the pact contain have also been criticised as being to harsh, or conversely called into question for not being strict enough in is requirements to implement reform. [6]
See also
References
- ^ http://www.economist.com/node/18332786
- ^ 25 March 2011 Council decisions
- ^ http://www.economist.com/blogs/charlemagne/2011/03/pact_euro
- ^ http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=3856661&story_id=18330371
- ^ http://de.wikipedia.org/wiki/Schuldenbremse
- ^ http://www.voxeu.org/index.php?q=node/6206