31. Volkswirtschaftliche Tagung

I am happy to be here with you, so many high-level representatives of the political, academic, business and banking world. We are here to analyse, discuss and reflect together how to foster economic growth in Europe. I was invited to make a contribution on "Institutional arrangements in the EU: Scenarios for the future" 

You might wonder why the Commission’s Chief economist is talking about "institutions" at a conference that focuses on "Fostering Economic Growth in Europe"? 

There are two good reasons for this. 

• First, one cannot have a conference on European issues these days without talking about the Convention.
• Second, the importance of institutions for economic growth is more and more recognised. A proper functioning of the EU after enlargement requires a reform of its institutions and its decision-making procedures.          

The Convention has discussed ways to reform the Union for more than a year. A first complete draft Constitution was presented two weeks ago by the Convention’s Presidium, a revised version last Friday. The Convention is in its last session today and tomorrow, to adopt a final text. 

Therefore, our discussion of this topic today is timely and risky. 

Timely – for obvious reasons. Risky – because nobody can be sure of the precise outcome tomorrow. In any case, the result of the work of the Convention will be presented to the European Council in Thessaloniki next week. 

It is important that the Convention agrees on a reasonable compromise tomorrow because, without reforms that make the institutional framework more efficient, the single market and Monetary Union will not function as well as they could, and economic growth in Europe would suffer. 

Subsequent speeches this morning will probably focus more on traditional economic policy instruments that support growth. 

But in my intervention, I will focus 

• first, on legal and institutional reforms in the EU;
• second, the need to strengthen economic governance;
• and third, whether the new, enlarged Union, requires more flexibility – perhaps a "multi-speed Europe" – if the European integration process is to continue;          

1 Institutional reforms at the EU level are both necessary and urgent 

1.1 Introduction 

Let me begin by talking about the need for legal and institutional reforms and what we can and should expect from the Convention. European integration has brought 50 years of peace, prosperity and stability in the EU. The EU today is a Union of States sharing a common set of democratic values. Integration has increased step-by-step; progress has often been slow and cumbersome, and there have been setbacks from time to time. 

But, looking back, the cumulative change has been overwhelming and has gone beyond what could have been imagined half a century ago. From the initial European Coal- and Steal Community, over a customs union to the creation of a single European market, EMU and the euro. 

Today, EU activities are based on four Treaties, where the working methods differ according to the area of activity. Some of them were drafted in the 1950s for a Community consisting of only six Member States. Looking ahead to a Union of 25 Member States next year, and a Union with probably more than 30 countries in the future – the current legal and institutional set-up is clearly inadequate. The "Convention" was established to address the future of the Union, and how it can be made to work more effectively. 

With 10 new Member States, the EU’s population will increase by 20%, the number of Member States by 65% and the number of official languages by 80%. This would be a challenge for any administration. Consequently, the accession has to be prepared. 

Far-reaching reforms of our institutions and our working methods that were already urgent anyway, can no longer be postponed. Otherwise, there could be gridlock. The institutions could loose their ability to take necessary decisions. That would hamper an efficient functioning of the single market and therefore economic growth in Europe. For instance, it took 14 years in the current system to reach a political agreement on the taxation of savings directive – with "only" 15 Member States. The take-over directive is still being discussed in the Council, after more than 10 years. These are just two examples that underline what Commission President Mr. Prodi meant when he said recently: "status quo equals paralysis for all of us". 

1.2 The Convention 

A first attempt to prepare the Community for enlargement was made in Amsterdam in 1997, and thereafter in Nice in 2000. But progress was rather disappointing as the traditional method to prepare Treaty changes, through inter-governmental conferences (or IGCs), reached its limit. 

The European Council in Laken (in December 2001) therefore entrusted the Convention with the task of preparing the future of the Union. The Convention started its work in early 2002 under the chairmanship of former French President Valéry Giscard d’Estaing. Its way of working is an innovation compared to the IGCs, where national governments were the only actors. The Convention includes representatives of the Member States, old and new ones, of the national parliaments and governments, of the European Parliament and of the Commission. Discussions are public. The Convention’s final proposal (or sets of options) will be presented at the European Council in Thessaloniki next week. As the Convention cannot modify the Treaty itself, it will be followed by an IGC later this year. 

As indicated earlier, the Convention’s main task is to prepare the Union’s future. The Laeken Declaration listed four sets of issues that the Convention should focus on: 

1. A better division and definition of competences in the European Union
2. Simplification of the Union’s instruments
3. More democracy, transparency and efficiency in the European Union
4. Creating a Constitution for European citizens          

The Convention has made good progress in a number of these areas. I will focus mainly on the areas that are of particular relevance for our conference theme: "Fostering growth in Europe". In that context, the main points are the following: 

• Firstly, the draft Constitution implies a marked simplification with a clear structure compared to the existing Treaties. It will also rationalise legislative and non-legislative norms within the Union. The current Treaties contain hundreds of provisions of various importance and scale. A ranking of the various Treaty provisions will make it possible to draw a distinction between the "fundamental provisions" (which could be fundamental rights, organisation of powers, principles of the common policies), and the "application" provisions. The draft Constitution sees a marked reduction in the overall number of provisions.
• Secondly, the draft Constitution goes a long way to make the European project more transparent and understandable to ordinary citizens. The Union’s fundamental values and objectives are enshrined in the first part of the Constitution and in the Charter for Fundamental Rights which is part two of the draft Constitution. All Europeans will continue to have access to "European citizenship" with a set of rights attached to it. Public opinion surveys are clear: An overwhelming majority of the EU citizens wants to expand the Union’s action into a number of new areas. The Convention has thus addressed the public’s desire for Europe to be more active in, for example, foreign policy, in justice and security, and in social affairs. They will all be part of the Union’s policy in the future.
• Thirdly, a number of proposals have been agreed in the Presidium as regards the institutional set up and decision making in the European Union. Of course, these proposals could again be changed by the Convention today and tomorrow but the proposal from the Presidium has found much support during the last few days.          

Before I go into the details of the institutional reform proposals, I would like to briefly recall the current structure: The European Union is a Union of both peoples and states. It is built on an institutional system, which is unique in the world. Based on the rule of law and democracy, Member States have delegated some of their sovereignty to the EU institutions. 

At present, the EU is run by five institutions, of which each plays a specific role. The power to carry out the Union’s legislative and executive tasks is shared by the Council, the European Parliament and the Commission. This is the very essence of the so-called "Community method", which has directly contributed to the building of Europe. It is based on the following principles: the Commission’s monopoly of the right of initiative (working in the interest of the Union and as the guardian of the Treaty); the widespread use of qualified majority voting in the Council (even if unanimity apply in some cases); an active role for the European Parliament; and a uniform interpretation of Community law by the Court of Justice. The fifth EU institution is the Court of Auditors. 

Everybody agrees that it is essential that the Council, the European Parliament and the Commission, will continue to share the legislative and executive powers. However the role and the responsibilities of the main European institutions need to be redesigned to make them more effective. Let me briefly go through the main proposals of the Presidium of the Convention as I understand them today: 

• A fulltime EU President will chair the European Council of national leaders. He (or she) will be elected for two and a half years (renewable once) by qualified majority. The aim is to improve the continuity and visibility of the Union’s work. There were some fears that the creation of a permanent President of the European Council would lead to an institutional duplication and the creation of a new bureaucracy. Therefore, in the Convention’s revised proposal, the President’s power has been limited, no deputies are foreseen, the original idea of creating a "bureau" for the President has been deleted and he will rely on the Council Secretariat.
• A new Foreign Minister of the EU will be appointed by the European Council and with the agreement of the Commission’s President. He will also be Vice President of the Commission. This will allow Europe to speak with one single voice on foreign policy issues.
• The draft Convention proposes to keep the current system of rotating the Presidency of all other Council formations, but prolongs the Presidency to at least a year.
• The Parliament gains in importance. It will, for example, get a greater role in decision making as the scope of co-decisions is extended to 34 new policy areas. It will also elect the President of the Commission.
• The Commission will continue to comprise one Commissioner from each Member State until 2009. This has been seen as important, particularly by the smaller Member States, in order to fully reflect the diversity of national concerns, and especially in a situation where a substantial number of new Member States will join the Union. However, according to the Presidium’s proposal, the Commission would be streamlined from 2009. In the future, the Commission would consist of 15 full members, and "Associate Commissioners" (or non-voting members) from all other Member States. The voting members will be selected on the basis of equal rotation between the Member States.          

All this means the Convention has been able to make progress on simplifying our legal framework and on developing the institutional set-up and decision making procedures. However, it has proven markedly more difficult to find a consensus on a number of other important issues. In particular, the debate is now on: 

1. changing the complex voting system in the Council, and
2. reducing the Member States’ veto powers.          

Firstly, as regards the system of weighting votes in the Council, the draft Constitution proposes a new dual and more straight-forward definition for qualified majority: a proposal is adopted if it is supported by a simple majority of Member States, representing at least three fifths of the population of the Union. This is seen as a very useful proposal by the Commission. But, this proposal has provoked a strong reaction from some countries, especially medium sized and smaller Member States. They would see a marked cut in their voting weights agreed in Nice that give them a disproportionate power compared to their population. As a possible compromise, the Presidium has therefore proposed to keep the existing rules until 2009. 

Secondly, where should Member States keep their veto power? In principle, qualified majority voting appears to me to be the only logical rule for decision making in the Council in the future – with a few exceptions in defence policy. That implies that the requirement for unanimity should be very strictly limited. Otherwise, I see a clear risk that the Union might become unmanageable. There could often be one Member State with a "vital interest", blocking and possibly blackmailing the others. We have seen this often enough. Recently, for example, when an old milk quota problem in one country was used to block the agreement on the taxation of savings directive. The draft Constitution proposes to extend the use of qualified majority voting to trade policy and, to a certain extent, also to justice and home affairs issues. This is very positive. However, the national veto would be retained in foreign affairs and tax policy. From an economic perspective, it is unfortunate that tax policies have been excluded from qualified majority voting, even tax issues that are related to the functioning of the single market. More effective decision-making in all major policy areas will be crucial if Europe is to use its full economic potential 

It appears difficult to find a compromise on these remaining major issues. Difficult, but not impossible. And as everything is linked, it is likely that there will be an agreement on the whole institutional package – or nothing at all. 

Summing up this first part of my intervention, I have talked about the need to reform the European institutions in order to allow them to function properly in a Union with 25 Member States or more. This is an important element when we think about achieving more growth in Europe. The Convention has made good progress in many respects, concerning e.g. a simplification of the Treaty, an enhanced role for the Parliament in decision making, and the creation of an EU Foreign Minister. However, some issues are still controversial, such as the complex voting system in the Council, or wider use of qualified majority voting. More progress in these areas would be welcome. 

2 Strengthened economic governance will contribute to improving the euro area’s growth potential 

Let me now turn to the second part of my statement: Economic Governance. 

In the EU, economic policies are mainly a national responsibility. At the same time, and as stipulated by the draft Constitution, the proper functioning of the single market requires Member States to coordinate their economic policies within the Union. The creation of EMU and the introduction of the euro have further reinforced the need for economic policy coordination. 

The key motivation for coordination is to ensure an adequate provision of common goods and to take into account externalities (or cross border spillovers) of national policies. For instance, national budgetary policy in one euro area Member State can have an impact on the single monetary policy and on the exchange rate. 

Structural policies can also influence the euro exchange rate, but the impact is likely to be more indirect, with a longer delay and less visibility. Co-ordination of budgetary and, to a lesser degree, structural policies are therefore important for a well-functioning EMU. Because of the importance for the single monetary policy, national budgetary policies are guided by the rules of the Stability and Growth Pact. 

Besides the Stability and Growth Pact, overall co-ordination of economic policies takes place through the formulation and adoption of the Broad Economic Policy Guidelines (or the BEPGs). These play a central overarching role, giving strategic direction on key economic policy issues in the medium term. They concentrate on the contribution that economic policies can make to meet the EU’s strategic Lisbon goal to raise the EU’s potential growth rate with more and better jobs and greater social cohesion. To complement the BEPGs, more specialised procedures, such as the Luxembourg process dealing with employment issues, and the Cardiff process dealing with goods, services and capital markets, go into greater detail in their respective areas. 

This overall framework for economic policy co-ordination that we have had for some time appears broadly appropriate. Some have argued that EMU cannot work without a political union. There was a particularly strong debate in this direction in my own country, Germany, as we prepared for monetary union in the mid-90’s. One of the outcomes of this debate was the proposal for the Stability and Growth Pact. In my view, the Pact is the core element of a political union that indeed has to be in place for monetary union to function well. But, the Pact needs to be applied! Otherwise, the framework for policy coordination would have a big gap. 

For the Convention, the Commission has proposed to strengthen the framework for policy coordination in three areas: 

1. through a stronger Community aspect in economic policy co-ordination;
2. through the institutionalisation of the Eurogroup; and
3. through improved external representation.          

How has the Convention reacted to the Commission proposals? 

Firstly, as regards strengthening the Community aspect of policy co-ordination procedures, the Convention proposes two important modifications: 

(a) it proposes that the Commission is given the possibility to directly issue a warning to a Member State whose economic policy is incompatible with either the BEPGs or the proper functioning of the EMU. This is a useful strengthening of the Commission’s role in its surveillance function, because the Council has not always followed the Commission’s recommendation. 

(b) the Convention proposes to exclude from the vote the Member State to which the Council addresses an early warning under the SGP – to avoid a situation in which a Member State would be both judge and defendant. 

Together, these measures should help to ensure that the Community interest is better protected in the economic policy co-ordination area. However, it is unfortunate in my view that the Council will continue to adopt the Broad Economic Policy Guidelines on the basis of a Commission recommendation rather than a proposal. This implies that the Council only needs a qualified majority and not unanimity to push through amendments to them. This might make it more difficult to ensure the respect of our rules, and to preserve the Community character and the overall coherence of economic policies. 

Secondly, with a view to strengthening policy coordination in the euro area, the draft Constitution foresees the institutionalisation of the Eurogroup by annexing a protocol on the informal gathering of euro area Finance Ministers, the Commission and the ECB. This would be a step towards institutionalisation, because so far the Eurogroup has only been mentioned in the European Council conclusions (of Dec 1997). In addition, a more permanent President of the Eurogroup would be elected for two years at a time, according to the Presidium’s proposal. 

The imminent enlargement of the Union makes a formalisation of the Eurogroup all the more important, since initially only 12 of the 25 Member States will participate in the euro area. In addition, the Convention proposes to extend the list of issues where the voting rights within the Ecofin Council are restricted to euro area Ministers only. It will now include issues such as the adoption of the BEPGs for the euro area, decisions on the excessive deficit procedure, and the related multilateral surveillance. 

But unfortunately, the Convention stops short of establishing an "Ecofin Council for the Euro Area" as proposed by the Commission. Such an euro area Council would really strengthen coordination in the euro area by allowing discussion and decision-making in a small group comprising only those countries that have adopted the Euro. 

Thirdly and regrettably, the Convention has so far not included the idea of a "European minister of finance and economic affairs" that would represent the euro area in international fora. Similar to the arrangements foreseen for the EU Foreign Minister, such a European Minister of Finance would be Vice President of the Commission and, at the same time, Chairman of the Eurogroup. At present, the euro area is represented by the ECOFIN Chairman (as long as this is an euro area member). Non-Europeans are often surprised by the frequent change of euro area representatives – there is no continuity. Economic governance of the euro area and its representation on the international financial scene (in the G7, IMF, or OECD) would be clearly strengthened by the creation of an EU Finance Minister. 

Summing up the part on economic governance, some of the recent proposals from the Convention go in the right direction. The Community aspect will be strengthened in economic policy making by giving the Commission a greater say, and decision making on certain issues related to the euro area will be facilitated. But it is not enough in my view: qualified majority voting also on tax issues would be important for the proper functioning of the single market and EMU. A stronger role for the Commission in the Council’s discussion of the BEPGs would enhance policy consistency. And, finally, there is a clear need to strengthen the external representation of the euro area. 

3 Will the new, enlarged Union lead to a multi-speed Europe? 

Let me come to the last part of my statement. I have earlier talked about the impact of enlargement on EU’s institutions. The question is if the new, enlarged Union is becoming too large and too diverse to allow a continued integration? With a more heterogeneous Union, in an economic and political sense, the need for a "differentiated integration" might increase. This would certainly be the case if the Convention fails to make sufficient progress. 

Several concepts have been put forward with respect to differentiated integration: Over the years we have heard about concentric circles, variable geometry, Europe à la Carte, two-speed or multi-speed Europe, enhanced cooperation etc. Although it may sound surprising, most of these concepts are actually used in practice! 

Concentric circles, for example, describe the concept that distinguishes the European Union from the European Economic Area that comprises Liechtenstein, Norway and Iceland, plus the EU. The four freedoms of goods, services, capital and workers apply to the entire European Economic Area – an outer circle – all the other Community policies only to the EU. 

Inside the Union, both the Schengen agreement and EMU are successful examples of a deepened integration that started with a subset of Member States, but remain open to all the other EU Member States if they meet certain criteria. It has evolved to prevent the EU from being forced to move at the pace of its most reluctant member. However, some fear that a differentiated integration might create a "first class" and "second class" Europe. Or a "Europe à la Carte". 

It is not unrealistic to assume that the new enlargement will indeed increase the need for a differentiated integration. History has shown that the unanimity requirement has prevented or slowed down further integration on occasions. Even today, there is no agreement among Member States about the speed and the scope of European integration. In addition, the consensus requirement allows one country to blackmail the others. "Differentiated integration" would be a way out. It can take many forms, but it is important to design it in a way that is compatible with the "Community method". 

One way of doing it could be to further develop the idea of a "multi-speed Europe". The expression often refers to a situation where the whole Union agrees (or at least accepts) common aims and objectives, but where not all countries are ready to participate in the enhanced form of integration from the start. EMU is such an example (if we leave aside the two opt-out clauses agreed with Denmark and the UK). All the new Member States are expected to participate in EMU eventually, allowing time for further convergence. But this might take some time for some of them. 

EMU is a form of multi-speed Europe at Treaty level. In practice, it is also often used in Community legislation in the form of country-specific transition periods. Similarly, the concept of country-specific transition periods has been applied in the accession negotiations, for instance with respect to environmental standards, the acquisition of agricultural land or secondary residences, cabotage restrictions in transport or the adjustment of minimum excise levels such as for cigarette excises. Very often, the length of transition periods was inspired by that granted to Member States in the original legislation. 

Less "communautaire" is the use of opt-out clauses, which has been a way to bypass the veto by one Member State that is not expected to participate in the enhanced integration for some time or at all. It has so far been used for Denmark (on EMU, justice and home affairs, acquisition of secondary residences, and defence arrangements) and the UK (on EMU and previously also on the social chapter). This form of integration would appear to be inconsistent with the "Community method" and the Commission, in principle, is against the use of opt-outs. Exceptions seem acceptable only if the effects are confined to the Member State that opts out. Therefore, it has only been accepted in a very limited number of cases in the accession negotiations with the group of new Member States, for instance secondary residences on Malta or the treatment of shale oil in Estonia. 

As you can see, the concept of differentiated integration is not new to the Union. However, it was only in the Amsterdam Treaty  that the EU formalised the possibility of a "closer cooperation" for a group of Member States that wish to act together, but under relatively strict conditions. The Nice Treaty facilitated an "enhanced cooperation" by limiting the possibility of Member States to veto. It requires a minimum of eight Member States for establishing an enhanced cooperation, ensures that it occurs within the framework of the European Union, and provides that Member States that do not participate immediately could join when they wish, if they meet the agreed criteria. Until now the concept of enhanced cooperation has not been applied, although at some stage we came close to it in the negotiations on energy taxation. Indeed, notably in the taxation area the free-rider problem poses a problem for enhanced cooperation. With the wider introduction of qualified majority voting, the need for enhanced cooperation may diminish. But it could allow more integration in the fields of foreign and defence policies. 

The draft Constitution includes an "enabling" clause (similar to Article 308 of the EC Treaty) that allows the Union – or a group of Union members – to expand into areas that are not yet covered by the new Treaty (as the Treaty must normally provide an appropriate legal base for every Union activity). The use of this provision is limited as the Convention proposes that such measures should only be adopted if it brings together at least one third of the Member States, and if it has been established that the objectives cannot be achieved within a reasonable period by the Union as a whole. Once enhanced cooperation is agreed, only representatives from participating Member States shall take part in the voting within the Council, even if all Member States will be allowed to participate in the deliberations. 

It seems to me that we will see more examples of enhanced cooperation or multi-speed integration as the Union grows. It may sometimes be the only way to make progress in European integration. 

4. Conclusion 

I have talked about the need to reform the European institutions to allow for a smooth functioning of the Union after enlargement. In particular, it is important to ensure that the single market and EMU can continue to function effectively in the new, enlarged Union. 

The Convention has spent the last year discussing how this could be done. Many proposals go in the right direction, and I am confident that a common proposal will be adopted tomorrow. That proposal will be discussed by the European Heads of State and Government in Thessaloniki next week and will become the starting point for the work of the Intergovernmental Conference (IGC) that will begin in the autumn. 

The new Constitution will simplify the existing legal framework. The transparent way in which the Convention worked itself has already contributed to make the Union’s task easier to understand. But there is a need to further clarify the roles and responsibilities of the European institutions. If there is agreement on a permanent European Council President, it will be important not to create confusion between the competences of that President and those of the President of the Commission, and not to create a new bureaucracy. 

We must also move away from the unanimity requirement as much as possible in order to make the single market manageable in the future. As for economic governance there are again a number of positive proposals in the Convention’s draft Constitution, strengthening the Community method. But some issues have been treated half-heartedly: such as the effective working of the Eurogroup and the euro area’s external representation. The Commission will continue to push for more progress in these areas, next week at the EC, and later in the year at the IGC. 

I also raised the question if there is a need for greater flexibility in Europe’s future integration as the number of Member States increases and the homogeneity between them decreases. I believe that this is necessary, if we want to continue with European integration, particularly in areas where we do not have much integration so far. 

It will be most interesting to see how far the Convention will be able to go tomorrow. How the final package will look like in all its details? Whatever happens today and tomorrow in Brussels, next week in Thessaloniki Chancellor Schüssel and his colleagues will continue the difficult, but important task of designing the necessary reforms to make the Union work in the future.