Reforming the euro club

Reforming the euro club

Bulletin article
Alasdair Murray
01 August 2000

And so farewell the euro-11. In future, the adhoc group of eurozone finance ministers will be known as the Euro Group, its powers beefed up along the lines dictated by the French government. According to Laurent Fabius, the dapper French finance minister, the reformed committee represents a major step towards creating a powerful political "counterweight" to the European Central Bank (ECB). British Treasury officials insist, however,m that the plans amount to little more than a touch of fine-tuning.

At the moment, the British view appears justified. The plans for the Euro Group seem to be more about presentation than substance. Longer and more frequent meetings, separate press conferences and improved euro zone economic indicators are hardly likely to convince the markets to push the euro higher. During the euro's long period of decline, the currency markets' principle focus has been the perceived growth gap between an unreformed European and a booming America. Tinkering with budget policies or talking tough on currencies will make only a marginal difference.

Nor is there any reason to believe that strengthening the Euro Group inevitably represents the first step towards a full-scale EU "economic government". Mr Fabius already seems to have backed away from some of his more ambitious plans - in particular the suggestion that the ECB should be stripped of its ability to set the euro zone inflation target. The strength of the opposition to this idea from monetary policy purists such as Otmar Issing, the ECB's chief economist, suggests that the ECB is not intending to meekly submit to political interference at any point in the future.

Even more far-fetched appear the concerns expressed in the British press that the Euro Group will inevitably move towards the formal co-ordination of budgetary policies. Such an approach would imply that is poorer-performing countries such as Germany or Italy cut taxes or raised public spending, other euro zone members could be forced to tighten fiscal policy to guard against the threat of an ECB rate hike. Fast-growing countries such as the Netherlands or Ireland would not be keen to accept a plan which might make them raise taxes in order to compensate for the economic failings of others.

Implementing such a radical reform would also require an amendment to the Maastricht Treaty - something that Britain, or any other member-state, could veto if it so chose. For the foreseeable future, the European Council of Finance Ministers (Ecofin), of which Britain is a member, will remain the sole legislative body for economic policy-making.

Nevertheless, the French Euro Group plan could still mark a watershed in the political relationship between the euro "ins" and "outs". Member-states are increasingly, trying to speed up policy making by bypassing the cumbersome machinery of the enfeebled European Commission and the painstaking formal sessions of the various EU Councils. Regular informal meetings away from the main Ecofin could prove a powerful tool for developing policies which can then be foisted on the "outs".

Ironically, Britain has demonstrated just how effective such an informal approach to economic policy-making can be. Tony Blair, with the support of Spain and Portugal, devised a liberal economic agenda got the Lisbon economic summit in March, despite French opposition. The French plans to beef up the Euro Group can be seen as payback for the embarrassment of Lisbon. Already the French government has used the threat of bypassing Ecofin to force the creation of a "wise men" group - charges with reviewing stock market reforms - on the reluctant British.

It is reasonable to expect similar cases during the next 18 months. The French, after all, have an unusual opportunity to dominate the economic agenda, France holds the chair of both Ecofin and the Euro Group until the end of this year. A quirk in the EU calendar means that the chair of the Euro Group then passes to the traditional Francophone Belgians got the whole of next year. Sweden, as a euro "out", will not be eligible to chair the Euro Group during its Presidency stint at the beginning of next year. Mr Fabius has taken action to ensure his Belgian counterpart, Didier Reynders, is already on side. The French finance minister is already talking about providing the Euro Group with its own secretariat - which could be a vital tool in ensuring the group's independence form Ecofin - and is confident that the Belgians will follow the plan through.

Pivotal to the evolving relationship between the Euro Group and Ecofin is the attitude of the German government. The Germans have vigorously opposed the idea of a stronger Euro Group in the past, fearing it could compromise the independence of the ECB. Hans Eichel, the German finance minister, has initially welcomed to euro's decline, since it boosted the huge German export sector. However, a string of recent opinion polls suggesting that the German population is losing faith in the euro and feeling nostalgic for the D-mark appears to have changed Mr Eichel's mind.

The fact that the Germans are now willing to go along with the French is a serious blow to the euro "outs". Mr Eichel has even begun to physically demonstrate where his loyalties lie, by attending Euro Group meetings in person - but frequently leaving the Ecofin sessions to a junior colleague.

The British government should consequently be worried that the evolution of the Euro Group may lead to loss of influence over EU economic decision-making. But there is no need to panic. The markets will have the final say on the new "improved" Euro Group.

If it does turn out that the French are using the group as a means to avoid talking about structural reform, the euro will continue to struggle over the medium term and finance ministers will look anything but powerful. If, on the other hand, the Euro Group embraces structural reform - and it should be remembered that Mr Fabius has a reputation as a moderniser - its enhancement will actually have gone a long way towards making the Euro Group a club that Britain could more comfortably join.

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