The economic governance of the EU and the principle of

democracy Asteris Pliakos

Professor of EU lawAthens University of Economics and

Business (pliakos@aueb.gr)

The European Union and the principle of democracy

• Democracy is one of the founding values of the European Union.

• Article 2 TEU: “The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

The principle of democracy at EU level

• “The functioning of the Union shall be founded on representative democracy” (art. 10.1 TUE).

• Representative democracy means the citizen’s right to determine, in equality and freedom, public authority (through their representative institutions, which have as main task to hold accountable the executives).

• “Citizens are directly represented at Union level in the European Parliament”. Member States are represented in the Council by their governments, themselves democratically accountable either to their national Parliaments, or to their citizens (art. 10.2 TEU). (Dual legitimacy, direct and indirect)

The democratic deficit

• Even directly elected, the EP’s democratic legitimacy is not generally accepted: Citizens are not represented equally in it, there is low interest and involvement in it and there is little popular commitment to it (German Federal Constitutional Court (GFCC), Gauweiler v. Treaty of Lisbon, Judgment of 30 June 2009, para.211).

• The EU as a union of states and peoples has to be legitimized also by national parliaments, which is the only genuine (for the GFCC) or the second (for the TEU) subject of legitimization in EU.

The principle of democracy and the Economic and Monetary Union

• EMU is established by the EU (art. 3.4 TEU). Its functioning must therefore be founded on representative democracy, which is the legitimizing principle of the EU public authority.

• EMU is characterized by the dominance of the European Council and the Council of Ministers and the absence of the EP.

• These two EU Institutions are not controlled, at the European level, by the EP. National parliaments exercise a national control concerning MS representatives.

Democratic control versus independent monetary policy

• The monetary policy of the EU (exclusive competence) is defined and implemented by the European System of Central Banks, whose primary objective is to maintain price stability, and, as a second goal, to support the general economic policies in the EU with a view to contributing to the achievement of the EU objectives.

• In order to preserve the independent application of the monetary policy, neither the European Central Bank, nor a national central bank shall seek or take instructions from EU Institutions and MS.

The economic policy of the EU and the EP

• The economic policy of the EU is based on the close coordination of MS’s economic policies, on the internal market and on the definition of common objectives (art. 119.1 TFEU)

• The main responsibility belongs to the Council of Ministers. The EP has a weak role (information and consultation), apart where detailed rules for the multilateral surveillance are adopted (ordinary legislative procedure)

• The EP is also only informed as regards the case of financial assistance and of excessive governments deficits (arts 122 and 126 TFEU).

The Lisbon Treaty and the National Parliaments

• Following the Lisbon Treaty, the Treaties provide for an increased role of NP (art.12 TEU).

• NP scrutinize their governments as to the activities of the EU in accordance with the national legal order.

• Protocol no 1 on the role of NP in the EU describes the obligation of the EU institutions to inform them of any draft legislative act.

• NP may send an opinion to their governments and a reasoned opinion to the Presidents of the EP, the Council and the Commission on the respect of the principle of subsidiarity (Protocol 2

National Parliaments and the control of EMU

• The weak control of the EP over EMU is not compensated for by the control of NP.

• The EU Institutions are under no obligation to inform and consult NP within the framework of:

• 1) multilateral surveillance of economic policies (art. 121),

• 2) budgetary surveillance in the MS (art. 126), • 3) the annual review of the employment situation• 4) the Council and European Council as regards

the operational committees for EMU, employment policy and social protection policies

The new EU economic governance

• The lessons learned from the financial, economic and sovereign debt crisis have led to successive reforms of the EU’ s rules, introducing among others new surveillance systems for budgetary and economic policies, and a new budgetary timeline.

• The new rules have introduced thought the Six Pack, the Two Pack and the Treaty on Stability, Coordination and Governance. The Euro Plus Act commits signatories to even stronger economic coordination. Finally, the creation of a Banking Union contributes to an effective MU.

The six-pack main features (i)• The six-pack is composed of five Regulations

and one Directive. They are EU secondary law and apply to 28 MS, with some specific rules for euro-area MS, especially regarding financial sanctions.

• They have entered into force on 13 December 2011.

• They cover fiscal and macroeconomic surveillance. They introduce the European Semester.

• In the fiscal field, they strengthen the Stability and Growth Pact (SGP).

The six-pack (ii)• MSs’ budgetary balance shall converge towards the

country-specific medium-term objective (MTO) (so-called preventive arm)

• The general government deficit must not exceed 3% of GDP and public debt must not exceed 60% of GDP (or at least diminish sufficiently towards the 60%)

• Financial sanctions for euro-area MS are imposed in a gradual way, and may eventually reach 0,5% of the GDP.

• It is introduced the reverse qualified majority voting (RQMV), i.e. the recommendation of the Commission is considered adopted in the Council unless a qualified majority of MS votes against it.

Treaty on Stability, Coordination and Convergence (TSCC) (i)

• The TSCC is an intergovernmental agreement (not EU law). It has been signed on the 2.3.2012 by 25 EU MS (all but UK and Czech Republic).

• It enters into force following ratification by at least twelve euro-area MS. It will be binding for all euro-area MS, while other contracting parties will be bound once they adopt the euro or earlier if they wish.

• The Fiscal part of the TSCC is referred to as “fiscal Compact”.

TSCC (ii)• Contracting parties have to ensure convergence towards

the country-specific MTO. Correction mechanisms should ensure automatic action.

• The country specific MTOs have to be enshrined in national binding law, preferably of constitutional nature.

• European Court of Justice may impose financial sanctions

• The RQMV applies to all stages of the Excessive Deficit Procedure, even if not foreseen in the six-pack.

• It reinforces the economic governance in the euro area, e.g. Euro Summits at least twice a year and reinforced economic cooperation.

The two-pack main features (i)• Two Regulations (2013) of the EP and of the

Council. They are applicable to euro-area MS and aim at further strengthening the surveillance mechanisms.

• Common budgetary rules at the national level shall be monitored by independent institutions.

• The Commission analyses if the draft budget is in line with the Stability and Growth Pact. It can require a revised draft budgetary plan. Otherwise it may address an opinion to the MS, which would also be discussed by the Euro-group.

The two-pack (ii)• The NP remain fully sovereign in voting the

budget law. • The Regulation incorporates elements of the

TSCC: independent institutions and an ex ante coordination of debt issuance plans.

• MS facing serious difficulties will be subject to enhance surveillance. MS are obliged to adopt the necessary measures. If not, they face financial consequences.

• MS shall be subject to post-programme surveillance as long as it has not repaid 75% of its debt.

A Pact for the Euro (i)

• Euro area Heads of State and Government have decided to adopt a Pact for the Euro to strengthen the economic pillar of the monetary union (11 March 2011)

• 23 MS signed the Euro Plus Pact. It commits signatories to even more economic coordination for competitiveness and convergence, also in areas of national competence, with concrete goals agreed on and reviewed on yearly basis by the European Council.

A Pact for Euro (ii)• The Euro Plus Pact is integrated into the

European semester and the Commission monitors implementation of the commitments.

• MS undertake to take all necessary measures to pursue the following objectives: 1) foster competitiveness, 2) Foster employment, 3) secure public finances and 4) reinforce financial stability.

• The choice of the specific policy actions remains the responsibility of each country.

Financial integration and Banking Union (i)

• The EU established in 2010 the European System of Financial Supervision composed of the 1) European Systemic Risk Board, 2) European Banking Authority, 3) European Insurance and Occupational Pensions Authority, 4) European Securities and Markets Authority.

• Moreover, rules have also been tightened on capital requirements for banks, investment firms and insurance companies. Rules on remuneration and bonuses will reduce incentives for short-term risk-taking. Finally, Bank stress tests have been conducted.

Financial integration (ii) • The banking Union aims at safeguarding financial

stability and minimize the cost of bank failures. • It will composed of the: 1)Single Supervisor Mechanism

(Council Regulation no 1024/2013), 2) the Single Resolution Mechanism, 3) an integrated framework for deposit insurance.

• The Banking Union is one of the four buildings blocks towards a genuine EMU. [i) integrated financial framework, ii) integrated budgetary framework, iii) integrated economic policy framework, iv) democratic legitimacy and accountability]

Democratic Legitimacy and Accountability

• Two principles have to be met: 1) In multilevel governance systems, accountability should be ensured at the level where the decisions are taken. 2) In developing EMU, the level of democratic legitimacy needs to remain commensurate with the degree of transfer of sovereignty from MS to the EU.

• The EP should ensure democratic accountability for EU decisions.

• National Parliaments should ensure legitimacy of their governments in relation to the EU activities

The six pack contribution (i) • An “economic dialogue” is established. The

economic dialogue between the EP and the Commission/Council/President of the European Council ensures greater transparency and accountability. It enables the Commission to make its analyses public about the effects of national decisions.

• The Commission and the Council must keep EP regularly informed on the application of the five regulations relating to the European Semester (a yearly cycle of economic policy coordination)

The six-pack contribution (ii)

• The Regulation 1176/2011 on the macro-economic imbalances fixes further obligations upon the Commission and the Council (e.g the annual report identifying the MS that may affect by economic imbalances).

• Economic dialogue entails a direct dialogue between the EP and the MS concerned.

• Un inter-parliamentary cooperation between EP and NP have to be established.

The TSCG contribution

• Apart from the worrying precedent for the process of European Integration (international treaty), the TSCG complements the role of EP as recognized by the six pack.

• The President of the EP may be invited to be heard-just as the President of the ECB may-to the meeting of the “Euro Summit”.

• A Interparliamentary conference of representatives of the EP and NP is foreseen (article 13 of the TSCG)

Conference on Economic and financial Governance of the EU

• The Conference shall meet twice a year and be coordinated with the European Semester. In the first semester of each year, it shall be held in Brussels, while in the second semester, it shall be held in the country holding the six-monthly Council Presidency (Presidency Conclusions of the Conference of Speakers of EU Parliaments, Nicosia, 21-23 April 2013)

• The first Conference has been held during the Lithuanian Presidency (16-17 October 2013) and the second in Brussels on 20-22 January 2014.

Prudential supervision of credit institutions

• Council Regulation 1024/2013 conferring specific tasks on the European Central Bank

• Art. 20, the ECB shall be accountable to the EP (annual report, hearing, oral and written questions, cooperation in investigation)

• Art. 21, National Parliaments (annual report, written questions, discussions)

Inter-institutional Agreement between ECB and EP

• Practical modalities of the exercise of democratic accountability and oversight

• The Agreement is without prejudice to the accountability of national competent authorities to NP in accordance with national law

• Organizational separation of the ECB’s staff (monetary policy and supervisory tasks

• Sanctions in case of breach of professional secrecy

The role and operations of the Troika

• Greece has requested financial assistance on 23 April 2010. An agreement was concluded between Greece and the Euro MS/IMF (International Monetary Fund), under the form of a Memorandum of Understanding (MoU) containing the policy conditionality for the assistance (25 March 2010)

• The release of each disbursement to Greece must by approved by the Euro-group and the IFM’ s Executive Board, after an opinion of the Troika (Commission, ECB and IMF staff)

Financial assistance Mechanisms and MoU

• First through bilateral loans, including non-euro countries, then through temporary emergency funds (EFSF and EFSM), finally through the ESM, which replaces all the other mechanisms.

• Greece, Ireland, Portugal, Cyprus: MoU and Troika: no legal basis in EU Treaties, lack of transparency in the negotiations and the decision-making process, no democratic oversight, not bound by the Charter of Fundamental Rights, or by the EU policies (e. g. health, employment), Commission acts as an agent of the Euro-group, the ECB as a “technical advisor”.

The new regime of the Troika• Regulation 472/2013 (the two pack) is a first,

even though insufficient, step in codifying the surveillance procedure in the euro area for countries facing financial difficulties.

• It confers a mandate on the Troika, it establishes more transparent procedures, it foresees the involvement of the social partners, it takes into consideration the national institutions for wage formation and the need to ensure sufficient means for fundamental policies, such as education and healthcare, it allows exemptions from the Stability and Growth Pact.

Differentiated integration (d.i.)• The EU Treaties provide for instruments for d.i.,

including enhanced cooperation, safeguard clauses, opt-outs, opt-ins and provisions specific to MS whose currency is the euro.

• Two forms: multi-speed (same goals, different timeframes), multi-tier (different goals)

• D.i. is a means to allow the progress of the EU, (e.g. EMU)

• D.i. has to respect the principle of equality (equal treatment of equal situations) and the principle of solidarity, and must not undermine the EU legal order.

D.i. and EMU• ESM and the TSCG were concluded in a

intergovernmental setting outside the EU treaties. Troika, EFSF and ESM, no scrutiny of the EP.

• They have to be incorporated into the EU legal order (within five years)

• Euro Plus Pact, Europe 2020 Strategy and the Compact for Growth and Jobs should be integrated into the EU law.

• The governance of a genuine EMU must be placed within the institutional framework of the EU. If not, activation of the flexibility clause and an enhanced cooperation.

EMU and Treaties Change(i)• A future Treaty change should affirm:• 1) the Euro-summit as an informal configuration

of the EC (+ Euro-group)• 2) The Commissioner for Economic and

Financial Affairs must become a Treasury Minister

• 3) The reversed q.m.v. in the Fiscal Compact should be integrated into the Treaties and be dependent on the co-decision of the EP and the Council

Treaty changes (ii)• 4) EP has to be included in the appointment

procedure of the President and other members of the Executive Board of ECB

• 5) The adoption of multi-annual financial framework has to be adopted by four fifths of the votes in the Council and a majority of the EP

• 6) Same procedure for the Own Resources Decision

• 7) MS with euro or wishing to participate in will provide for specific own resources

• 8) EP has to give its consent for Treaty changes

Conclusion

• The level of democratic legitimacy needs to remain commensurate with the degree of transfer of sovereignty from MS to the EU

• In a full fiscal and economic union, concomitant with the EP’s competence to decide on the resources of a substantial central budget, the EU must have the competence to issue sovereign debt, to guarantee the principles of unity, equality and solidarity, and the objective of the well-being of its peoples, if not its people.