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Questions to the economy commissioner-designates

European Commission President-elect Ursula von der Leyen disseminated her mission letters to commissioner-designates. In my opinion, the letters to economy commissioners highlight several essential priorities, yet they leave a number of important questions open that I recommend Members of the European Parliament to ask at the upcoming parliamentary hearings of the designates.

By: Date: September 23, 2019 Topic: European Macroeconomics & Governance

In the Von der Leyen Commission, economic issues will primarily belong to the “Executive Vice-President for An Economy that Works for People”, whose designate is Mr Vladis Dombrovskis, and the “Commissioner for Economy”, whose designate is Mr Paolo Gentiloni.

In my reading, the mission letters (see here and here) contain several crucial priorities. These include ensuring social fairness, strengthened democratic accountability of the EU’s economic governance by a greater involvement of the European Parliament, developing a sustainable investment plan and a long-term strategy for EU’s industrial future.

Strengthening the international role of the euro, supporting structural reforms to speed up inclusive growth and territorial cohesion and the resilience of the European economy and designing a European Unemployment Benefit Reinsurance Scheme are also among the key priorities.

Tax priorities include digital and environmental taxation, completing the negotiations for the common consolidated corporate tax base, fighting tax fraud, tax evasion and tax avoidance along with harmful tax regimes around the world.

As regards financial affairs, key priorities include the completion of the Banking Union, speeding up the works towards a Capital Markets Union, development of a green finance strategy and a FinTech strategy, supporting the initial public offerings for small and medium-sized enterprises (SMEs) and fighting money laundering.

I welcome these priorities, which are well in line with the recommendations in our memos to the new EU leadership, though for several areas we recommended more ambition. While these priorities themselves would deserve discussion, in this post I focus on five important issues which are unclear in the mission letters or missing completely.

1. Fostering social fairness and reducing social inequalities
The mission letters are unclear about how to achieve these goals. They list the implementation of the European Pillar of Social Rights, efforts to fight tax fraud/evasion/avoidance and “refocusing the European Semester so that it integrates the United Nations Sustainable Development Goals” (see info about the UN SDGs here). But would these measures be enough to reduce social inequalities? Social policies in the EU are predominantly national, so the Commission can only make recommendations to member states. Will social issues gain more prominence in the European Semester country-specific recommendations (ES CSRs), including advice on tax-benefit policies? For example, will the Commission recommend progressive personal income taxes (PIT) where PIT is flat, and will the Commission recommend increased inheritance and wealth taxes, which are powerful tools in reducing social inequalities? Is there a need for a change in the priorities or the allocation of the European Social Fund (ESF), which was proposed by the Juncker Commission to have a total budget of €101bn in the 2021-2027 EU Multiannual Financial Framework? Does the incorporation of UN SDGs relate only to European citizens, or also call for much increased efforts to support those more than 700 million people worldwide who live in extreme poverty and struggle to fulfil the most basic needs like food, health, education, and access to water and sanitation?

2. Implementation of European Semester Country Specific Recommendations
The mission letters are silent about the dismal implementation rates of the ES CSRs (see e.g. our analyses of implementation rates here and here). Without greater implementation, the rationale for making recommendations is questionable. What do the commissioner-designates plan to do to achieve greater implementation?

3. Stability and Growth Pact (SGP)
There is only one paragraph which has a reference to EU’s fiscal rules: “You will ensure the application of the Stability and Growth Pact, using the full flexibility allowed in the rules. This will help us achieve a more growth-friendly fiscal stance in the euro area and stimulate investment, while safeguarding fiscal responsibility.” European fiscal rules and institutions embodied in the SGP have been subject to intense criticism (see e.g. here), but the above sentences do not indicate any need for reform. Do the commissioner-designates regard the current EU fiscal framework adequate? The clause “using the full flexibility allowed in the rules” suggests a lenient approach to the enforcement of the rules, similarly to the practice of the Juncker Commission. What are the views of the commissioner-designates about the critiques formulated by the European Court of Auditors, who recommended a change in the Commission’s practice?

The second sentence from the citation above suggests that fully flexible application of the SGP will lead to a growth-friendly fiscal stance in the euro area. I would be curious to hear the commissioner-designates view on how this will work. I’m afraid that Germany, the largest euro-area country that has ample fiscal space and not at all constrained by the SGP, will not invest more due to a fully flexible application of the fiscal rules. On the other hand, Italy, the third largest euro-area country which has received extreme flexibility exceptions from the rules by the Juncker Commission, has such a limited fiscal space that an even more flexible rule application would seriously undermine fiscal sustainability. It is hard to see how the growth-friendly euro-area fiscal stance would add up.

4. Macroeconomic Imbalances Procedure (MIP)
While the SGP is mentioned at least once in the mission letters, none of the mission letters mention the MIP. Does this mean that the MIP will have a low profile in the next five years? What are the views of the commissioner-designates about the violations of MIP rules? Do they see a problem with the large current account surplus of the euro area, which is now larger than the surpluses of China, Japan and Russia combined?

5. Tools to address the next economic downturn
Economic activity has significantly weakened in the euro area in the past few months and the risk of an economic downturn has increased, not least due to global trade tensions and the uncertain Brexit outlook. One of the mission letters highlights the issue of the next economic downturn and the risks coming from high debt levels: “You should ensure Europe increases its resilience to shocks and should ensure stability in case of another economic downturn. Current high debt levels are a source of risk and a constraint on governments offering macroeconomic stabilisation when needed. You should look at how to address debt levels in both the public and the private sector.

I agree that in countries with high debt levels, macroeconomic stabilisation will face major constraints. But how do the commissioner-designates plan to address high public and private debt levels? What will they recommend in the event of a recession? For example, would they call for a coordinated discretionary fiscal stimulus as it was done by the Barroso Commission in 2009, even if that would lead to a breach the 3% SGP deficit limit in some countries? Would they recommend the deployment of the EU budget to address the cyclical downturn in a way, or call the European Investment Bank (EIB) to increase its lending activities?

I recommend the Members of the European Parliament ask these questions from the commissioner-designates at their upcoming hearings.

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