Now is a good time to show some courage

National leaders continue to fear the wrath of voters about radical economic reforms.

“The Juncker Doctrine is dead” is not the snappiest of slogans, but for the European Commission, it is the equivalent of Barack Obama’s “Yes, we can”. Confronted by deep scepticism in the financial markets as to whether economically depressive policies are politically sustainable in Greece, Ireland and elsewhere, Commission President José Manuel Barroso and his team are desperate to convince member state governments that radical reforms will not inevitably lead to political defeat.   

Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the Eurogroup, gloomily observed three or four years ago that “we know what we have to do, but we don’t know how to get elected afterwards”. Speaking before the whirlwind unleashed by the sub-prime crisis, Juncker was trying to explain why the EU’s member states were dragging their feet on, among other things, structural reforms of labour markets and pension and educational systems.

But the EU has brushed with near-disaster since then. The policy changes required by the Lisbon Agenda’s objectives, though undoubtedly challenging, were a minor redesign compared to the savage public spending cuts, job reductions and shrinking of welfare provision now taking place in many member states.

Though the European Council is rhetorically committed to stabilising public finances through a devout application of tougher rules on deficits and debt, most governments are still only in the early stages of delivering the necessary policies. The exceptions are, of course, those countries that are close to excommunication from the sovereign debt markets, Greece, Ireland and Portugal. These are struggling to hold the line on deeply unpopular policies. Spain, Italy, even France, have still to travel further along this perilous reformist path before they can be confident of winning the confidence of anxious investors wanting maximum certainty that governments will honour their debts.

So it was that Olli Rehn, the European commissioner for economic and monetary affairs whose strength of backbone has surprised some and won the respect of many, came to the rostrum of a Brussels conference organised by the Commission last week (12 January), to give eurozone governments a pep talk. He wants to guard against any weakening of political resolve in national capitals that might put even more distance between the Union and its goal of faster growth and job creation. For Rehn and his Commission colleagues, now is a time for courage and for burying the Juncker Doctrine.

There were good examples, he affirmed, of governments that had pushed through fundamental economic reforms and then gone on to win elections. Sadly, his honours list is still light on big names. The commissioner and others point to the Reinfeldt government in Sweden, followed by Latvia. Recent regional elections in Greece had been a success for the Papandreou government, said Rehn, somewhat more disputably, before drawing on his own experience in Finland of being a minister in a reformist government of the mid-1990s that won one election and then lost another.

Without more political heavyweights, this roll call of honour will never be inspirational. Some may take comfort from the Liberal Democrats’ strong showing in a UK parliamentary by-election last week, but there were special circumstances and the UK government’s cuts and welfare changes are still at the starting-gate. Austerity programmes have to be multi-annual and the Commission’s hopes of ensuring that governments stay the course are very much based on the ‘European Semester’ launched on 1 January.

Designed to snare governments into co-ordinating, adopting and pursuing virtuous economic policies, this complicated set of procedures is largely the stability and growth pact on steroids. The Commission’s powers to embarrass and bully governments have been beefed up and the (highly aspirational) goal is the adoption by national parliaments of national budgets that will enhance the EU’s growth and competitiveness and erode economic imbalances between member states. All this is to be a result of Com-mission scrutiny, Council co-ordination and new surges of political will.

Why should this work any better than the stability and growth pact of old that enabled France and Germany to ignore the official budget deficit limits that they had signed up to and were pledged to enforce? And how relevant is it to resolving the sovereign-debt crises on the Union’s periphery? The Commission says that countries have been so badly burned by the impacts of the current crisis on public finances that they will never want to run the risk of repeating them. Hence-forth, the markets will be much more aggressive than in the past in punishing governments that get out of line.

Nonsense, say the critics, led at last week’s conference by Daniel Gros of the Centre for European Policy Studies, who delivered a devastating tirade. The European Semester is no direct help in convincing sovereign-debt investors that some governments will not default on their debts, he said. Political will is needed to expand the funds of the European back-up facilities and to impose automatic punishments on governments that ride roughshod over rules and ignore political agreements. If Gros is right, it is much too soon to give the last rites to the Juncker Doctrine. The EU is not over-endowed with high quality, courageous leaders. The doctrine may still be alive and well.

John Wyles is chief strategy co-ordinator of the European Policy Centre.