Competiveness pact
February 3, 2011
German Chancellor Angela Merkel and French President Nicolas Sarkozy intend to propose a plan for eurozone members to coordinate national economic policies at a meeting of EU leaders in Brussels on Friday.
The two influential EU heads of state plan to push for harmonization of policies on issues such as taxes, wages and retirement ages, according to government sources.
The "pact for competiveness," as the plan is dubbed, is not part of the official agenda but is high on the priority list of EU member states that share the euro. It calls for closer coordination of national economic plans among the 17 member states in the euro bloc to avoid the big economic imbalances that have separated many of them in recent years
Whole new level of cooperation
Envisioned measures include harmonizing corporate taxes to avoid tax havens and coordinating wage costs to ensure stable financing for pensions.
The competiveness pact, which would be open to all EU member states, is a key part of a comprehensive package of actions designed to strengthen the eurozone. Government leaders will discuss the package at the summit on Friday but are not expected to vote on the various measures until March.
Eurozone member states that have fueled economic growth through low corporate taxes and still refuse to raise retirement ages due to changing demographics, among other issues, are expected to challenge the competitiveness pact.
If adopted, however, the plan would radically transform the EU, taking European cooperation to a whole new level.
Chancellor Merkel could take the center stage. Initially reluctant to make fundamental changes in the core EU fabric, she now appears determined to rectify what many have long viewed as a design flaw of the common currency: a monetary union without a common economic policy.
German industry approves of Merkel's push for greater economic harmonization but, in the same breath, disapproves of any moves to create a centralized EU economic government.
"Members of the eurozone need to coordinate their national economic policies more closely, and that means establishing the proper framework conditions," Hans-Peter Kietel, president of Federation of German Industries (BDI), said in a statement. "But we object to a centralized steering of economic policy in Europe."
Securing euro stability
Kietel added that German industry supports all measures including a competitiveness pact that secure the stability of the euro.
The German Chamber of Industry and Commerce (DIHK) shares a similar view. In an e-mail, DIHK economic expert Dirk Schlotböller warned of "a further centralization of competencies in the hands of a European economic government" but agreed to the need for greater economic coordiantion among member states and for sanctions to force their compliance.
German industry has every reason to support the single currency. The euro area is its single biggest market, accounting for 43 percent of its exports, according to DIHK.
Shipments of cars, train and chemicals, for instance, have more than doubled since the euro was introduced. More recently, they helped Daimler, Siemens and BASF bounce back from the credit crisis stronger than ever.
At the Detroit auto show last month, Daimler CEO Dieter Zetsche conceded that while many German taxpayers have been critical of the their government's willingness to help bail out Greece and Ireland, "the German economy is doing well and wouldn't have been in this situation without the euro."
Unsustainable economic policies
Financial and economic experts also welcome any moves toward greater economic coordination to keep the euro a strong currency. "Europe definitely needs greater economic coordination and measures to promote competition and prevent countries from pursuing unsustainable economic policies," said Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy.
All of these economic measures, he told Deutsche Welle, should be integrated into the European Stability Mechanism, which, in a couple of years, will replace the current European Financial Stability Facility as a fund to help eurozone members in financial trouble. "If the competitiveness pact is just another grand scheme like Europe 2020, member states will agree to it but walk away and do their own thing."
Author: John Blau
Editor: Stuart Tiffen