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Rethinking the Governance of Economic and Monetary Union: Should rules continue to rule?

Although the EU economy has returned to a period of stable growth since the Eurozone crisis, several key issues in the governance of economic and monetary union remain unresolved. Drawing on results from the Firstrun project [1]Iain Begg  [2]provides an overview of current concerns and outlines five recommendations to help further the debate.

The turbulent times of the last decade have prompted a wide-ranging reassessment of the architecture, principles and governance of economic and monetary union (EMU). Although the EU economy is showing welcome signs of returning to more stable growth and there is a consensus that the reforms to date have ushered-in a more robust and resilient framework, many key issues remain to be resolved. In particular, shortcomings in the hitherto dominant rules-based approach have prompted a search for new solutions. Among the concerns are:

This article summarises some of the principal messages from a longer policy report [3], itself an overview of policy-relevant findings from several of the contributors to the Firstrun [1] project. It focuses on three main themes: fiscal and other macroeconomic policy rules; the scope for Fiscal Councils to enhance governance and the ensuing risks; and the imperative of achieving better legitimation of the processes and mechanisms.

Key messages on rules

Much of the academic interest in rules has been on their design and the importance of well-aligned incentives, but a broad consensus is that the EU system of fiscal rules has become too complicated and that they are too prone to lead to inappropriate policy prescriptions. Doubts have grown about the economics behind rules, not least where they have led to fiscal policy tighter than was warranted at a time of enduring stagnation. More specifically:

Rules will undoubtedly continue to be part of the EU economic governance framework, but an over-arching message from this report and, more generally, from the Firstrun project is that reliance on them will not be enough to guarantee sustainable public finances, let alone macroeconomic stability. Other implications include:

Key messages on Fiscal Councils

Among recent governance reforms was the expectation that independent Fiscal Councils charged with monitoring fiscal sustainability would be introduced. Nearly all Member States now have these bodies and there is also now a European Fiscal Board which advises on, inter alia, the euro area fiscal stance. The role and influence of Fiscal Councils has been examined in Firstrun research from two perspectives: how they have affected policy-making and whether they add to concerns about the legitimacy of governance developments. Because, in many cases, they have only recently been established, assessments have to be tentative, but key points include the following:

Legitimation challenges and the fiscal constitution

The need to reconcile legitimation and effective governance has repeatedly been acknowledged – not least as one of the four pillars of both the Four and Five Presidents [4] reports, but solutions have been difficult to find. The root problem is to reconcile the desire for collective discipline, portrayed as being in the common interest, with national autonomy and democratic choice, so that:


‘You cannot run a single currency on the basis of rules and statistics alone. It needs constant political assessment, as the basis of new economic, fiscal and social policy choices’ – Jean-Claude Juncker [5]

Many contributions to the debate on the future of EMU governance have sought to find ways to balance the sharing of risks and the control of risks in the policy framework. A recent example is the ‘Saint Nicholas’ package of proposals from the European Commission [6] for a series of initiatives to deepen EMU, through assorted measures to improve the institutional mix. A further high profile intervention was by the group of fourteen French and German economists [7] proposing a compromise approach aimed at bridging the long-standing differences between advocates of risk sharing and risk controlling. Unsurprisingly, the latter has elicited conflicting reactions.

The following recommendations, derived from the Firstrun findings, are put forward to further the debate and to emphasise the importance of reconciling what is economically desirable with what is politically feasible. Two underlying messages are that neglect of the political economy dimensions of governance reform would be perilous and there should be greater urgency in arriving at solutions.

Recommendation 1: the proliferation and complexity of fiscal rules should be rationalised with the emphasis placed on debt sustainability and on national rules.

Recommendation 2: institutional relationships which are crucial to the implementation of rules should be recast to ensure a better balance between enforcement, compliance and appropriateness.

Recommendation 3: recognising that the macroeconomic imbalances procedure is having only a limited impact on national policy choices, it may be better to revert to softer forms of coordination, with a greater emphasis on carrots than sticks.

Recommendation 4: Fiscal Councils can become significant actors in economic governance, but their role within the governance framework has to be better developed and integrated with the surveillance emanating from the EU and international institutions. Efforts have to be made to strengthen the legitimacy of councils.

Recommendation 5: although legitimacy concerns around the evolution of governance have repeatedly been highlighted, they have yet to be adequately addressed and should be accorded higher priority.

Note: This article is based on a policy brief which draws results from the Firstrun [1] project. Featured image credit: Andrés Nieto Porras [8] (CC BY-SA 2.0 [9])

This post originally appeared on the London School of Economics European Politics and Policy [10] blog.


Iain Begg is Professorial Research Fellow [11] at the European Institute and Co-Director of the Dahrendorf Forum [12], London School of Economics and Political Science, and Senior Fellow on the UK Economic and Social Research Council’s initiative on The UK in a Changing Europe [13].