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«By David J. Howarth University of Edinburgh d.howarth ABSTRACT French policy-makers have been caught in a dilemma with regard to the ...»

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French visions of EU-level ‘gouvernement économique’ The issue of economic governance has been raised by the French more than any other Eurozone member state: a preoccupation that reflects concerns linked to the traditionally widespread reluctance to accept central bank independence, the tradition of state interventionism in the economy and the 'sound money' bias of EMU. Since the start of negotiations on the EMU project in the late 1980s, the issue of EG has been constantly present in French political discourse and policy demands at the European level. The term 'economic governance' can signify several different things. In general terms, EG is an institutional set up at the European level that is designed to establish some form of macro-economic policy, be it only 'soft' / non-binding economic policy coordination, that has direct impact upon the member states. This is a form of collective governance (Wallace 2000; 541ff) 'among core actors from several institutions and bodies in a multi-faceted network which is constituted by mutual participation patterns' that can be called horizontal fusion (Wessels & Linsenmann 2001). In the academic literature — describing what has been created or recommending what should be created – this includes different modes of governance: the 'hard' coordination in the realm of monetary and fiscal policies and the 'soft' coordination in the area of economic and employment policies.

What various French proponents mean exactly when they espouse EG has been unclear even though there has been a limited attempt by French academics and government economic advisors to explore possible EG scenarios (see, notably, Boyer 1999; Boyer and Dehove 2001). Different governments — indeed different policy makers — place different emphasis on different kinds of coordination and the appropriate role to be fulfilled by the Eurogroup. Five objectives of 'economic governance' – some overlapping; some contradicting – can be discerned from French policy statements over the past fifteen years. These all relate

to the objective of EG that was explicitly established by the Maastricht Treaty and the SP:

EG as coordination of macroeconomic policies to achieve greater price stability – to support fiscal policy coordination (which is supposed to involve binding rules and even fines). Thus EG was expected to reinforce the primary objective – low inflation – of the ECB (with economic growth and employment as a secondary objective), promote a positive coordination role between Ecofin and the ECB and prevent individual member states ‘free-riding’ off the low inflation achieved by the central bank and other Euro-zone member states. EG as the achievement of price stability has involved the supposedly 'hard' coordination of the convergence criteria rules (with rules for the imposition of fines established in the Stability Pact) and ‘soft’ coordination consisting of the mutual surveillance of national macroeconomic policies begun in Stage One of EMU in 1990 with the establishment of Broad Economic Policy Guidelines and the requirement that member states prepare and submit medium term reports, which was reinforced by Regulation 1466/97 of the SP that established the Stability and Convergence Programmes. For economists, the price stability elements of the treaty and the SP are designed to prevent the dangers of a ‘chicken game’ between fiscal and monetary authorities and of certain participating states ‘free riding’ off the stability achieved by other member states.

Economic governance as ‘effective policy mix’ No French politician would claim that EG exists only to achieve price stability. Thus this understanding of EG associated with the application of Maastricht Treaty and SP rules is always presented in the context of EG as achieving an ‘effective policy mix’ which aims to promote a more active coordination of member state policies to increase economic growth and employment creation in the context of the ‘sound money’ goals of the EMU project. This is about qualifying / counterbalancing – but not directly challenging – the drive for monetary stability. This form of EG would involve a positive coordination between the Council and the ECB. Such emphasis on effective policy mix can either involve an acceptance of an ECB (monetary policy) leadership role (thus the Council places clear limits on its pursuit of improved economic growth and this does not become inflationary) or a direct challenge to this role, emphasising instead the need for a tighter coordination of national macroeconomic policies (although not necessarily via precise binding rules) to achieve stronger economic growth and employment creation. French government rhetoric and policy has presented both these forms of ‘policy mix’ while tending to favour the latter.

Initial French interest in EU-level economic governance – in the context of the discussions and negotiations on EMU in the late 1980s to the final agreement on the design of EMU at the December 1991 Maastricht Summit – stemmed in large part from widespread French concern for the need for an effective policy mix which involved containing ECB monetary policy in a broader macroeconomic policy established by governments. Pierre Bérégovoy, Minister of Finance from 1988-1992, sought to counter what he saw as the excessive influence of the national central bank governors in the design of EMU (Howarth 2001). During the period following the first meetings of the Delors Committee, Bérégovoy and Treasury officials introduced the idea of 'gouvernement économique'. In the French draft

treaty of January 1991 they insisted:

Everywhere in the world, central banks in charge of monetary policy are in dialogue with the governments in charge of the rest of economic policy. Ignore the parallelism between economic and monetary matters... and this could lead to

–  –  –

Moreover, the Treasury proposed that the European Council, on the basis of Ecofin Council reports, define the broad orientations for EMU and the economic policy of the Community.

Within these orientations, Ecofin would co-ordinate the policies of member states and make recommendations to individual governments and the ECB would manage European monetary policy. Bérégovoy and Treasury officials also argued in favour of giving the ministers of economics and finance control over exchange rate policy. 4 The French draft treaty sought to limit the European bank’s margin of manoeuvre as much as possible. 5 The draft treaty also very much reflects Treasury attitudes regarding the goal of price stability and French monetary policy tradition. It maintains a double language in favour of both the primacy of 3 For a copy of the French Draft Treaty see Revue Financière Internationale: aujourd'hui l'écu, numéro spécial, June 1991; and Agence Europe, 28/29.1.91, 5419.

4 Communiqué du Conseil des Ministres, 5.12.90 and the French proposal for an EMU treaty, Agence Europe, 28/29.1.91, 5419.

5 Agence Europe, ibid., 5419.

monetary stability (article 2-3.1) while giving the European Council and Ecofin the means to challenge this primacy. The Germans opposed any powers to the Council beyond ensuring that the member states respect the specific convergence criteria they sought to place in the EMU treaty. Ironically, given subsequent French government difficulties keeping the deficit below 3 per cent, French negotiators were flexible on the inclusion of the convergence criteria and even proposed the precise 3 per cent figure which proved so economically and politically constraining in subsequent years. 6 Since 1992, French governments have translated ‘effective policy mix’ into increased national margin of manoeuvre in macroeconomic – and notably fiscal – policy. All French governments since 1996 publicly opposed the constraining features of the original Stability Pact and none undertook the kinds of structural reforms needed to ensure that France would meet the medium term goal of a budget 'close to balance or in surplus'. The Jospin Government in it latter years (especially from 1999) and the Raffarin UMP Government both prioritised tax cuts over deficit cuts. Major reductions in tax were one of the principal campaign pledges of President Chirac and the UMP in the 2002 presidential and legislative elections. Chirac spoke with a forked tongue for domestic public and European political elite audiences. While emphasising tax cuts in the domestic debate, he and the UMP also regularly confirmed France’s commitment to meeting the medium term SP goals.

Repeated German failure to meet the 3 per cent deficit figure from 2002 gave the French greater political margin of manoeuvre on the SP rules. The Raffarin Government formed a pro-reform alliance with the Schröder Government. The French government then accepted the Schröder Government’s demands that the application of the SP’s Excessive 6 In 1991, France was one of the few EC member states to respect all five criteria and, until that date – apart from 1983 – since the Second World War, France had avoided a public spending deficit greater than 3 per cent. The 3 per cent deficit limit was first set by the French Socialist Government in the context of its abandonment of its Keyensian experiment of the early 1980s. With a 3.1 per cent deficit in 1983, President Mitterrand resolved not to exceed 3 per cent in the future.

Deficit Procedure (EDP) be suspended and joined with the Germans to force through the suspension at the 25 November 2003 Ecofin meeting. 7 Official French policy on the SP insisted that the non-application of the EDP did not amount to an abandonment of France’s commitment to the Pact (Le Monde, 26.11.2004). However, the Raffarin Government insisted upon a more flexible application that would – officially – take into consideration the economic situation facing a participating member state and – in practice – allow more scope for political bargaining and thus margin of manoeuvre for French (and other) governments.

Both the Jospin and Raffarin governments let it be known that a reformulated Pact should take into consideration deficit spending on public investment (notably physical infrastructural and research spending) – eliminating this for total public deficit considerations – which would allow for greater margin of manoeuvre. This was most recently defended through a report published 18 November 2004 by economists in the Economic Analysis Council (Conseil d’analyse économique) attached to the Prime Minister’s office. Allied to the Schröder Government, the Raffarin Government insisted on discounting public spending on research – especially given the EU’s official (Lisbon) research spending objective of 3 per cent of total GDP by 2010. The Raffarin Government also accepted (Le Monde 3.12.04) the Schröder Government’s insistence that all national spending on EU engagements be taken into consideration when judging national deficits: thus allowing net contributors to the EU budget like Germany but also France more leeway in comparison to net recipients. With the largest total defence budget in the EU, President Chirac and the Raffarin Government also 7 Article 104.8 (TEC) states that ‘Where it establishes that there has been no effective action in response to its recommendations within the period laid down, the Council may make its recommendations public.’ Article 104.9 (TEC) states that: ‘If a Member State persists in failing to put into practice the recommendations of the Council, the Council may decide to give notice to the Member State to take, within a specified time-limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation. In such a case, the Council may request the Member State concerned to submit reports in accordance with a specific timetable in order to examine the adjustment efforts of that Member State.’ These provisions were not applied to Germany and France.

demanded that defence spending be excluded from deficit calculations (Chirac 14.7.2004).

French governments – both left and right – supported a more flexible medium term target that did not insist upon balanced budgets, as in the original Pact, yet was still designed to reduce debt in the long term. The French wanted each country to have its own medium term objective that would in effect would increase government margin of manoeuvre by submitting the determination of this target exclusively to ministerial judgement and thus abandoning completely the automaticity enshrined as a central tenet in the Pact which arguably impeded the development of an appropriate policy mix for each Euro-zone member state. Both the Jospin and Raffarin Governments were officially hostile (Treasury officials, interviews April and May 2005) to proposals to render the Pact more ‘symmetric’ by increasing the constraint on fiscal policy – forcing the further reduction of deficits – during periods of economic growth. This constraint was considered politically unacceptable to governments wanting to ensure maximum margin of manoeuvre in fiscal policy.

After lengthy and rather acrimonious debate in the Eurogroup, Ecofin and the European Council, on 20 March 2005, the EU member state governments reached an

agreement on SP reform, containing the following changes to the existing rules:

• While the official deficit threshold will be maintained, there will be a derogation – allowing a member state to exceed temporarily the 3 per cent figure to a limited extent – in the event of slow economic growth (no precise figures being provided).

• A temporary (period of time not defined) deficit will not be declared excessive if the member state concerned devotes considerable public expenditure to one of several ‘other relevant factors’ 1) investment; 2) research and development; 3) structural reforms (only those which have a long term impact on the solidity of public finances will be taken into account); 4) EU policy goals; 5) European unification; 6) international ‘solidarity’ (which the French insisted would include spending on both aid and military). Further consideration would be given to these ill-defined spending categories. Once the 3 per cent deficit limit is reached the Council and Commission will examine the extent to which spending on these ‘pertinent factors’ contribute to the deficit in question.

• A member state which has achieved a public spending surplus during periods of relatively strong economic growth and which has a relatively low debt burden will be treated more leniently

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