EMU could spawn new power bloc

In the longer term, the greatest potential impact may be on the development of the eurogroup, the informal conclave of finance ministers of the eurozone members. That informality is already set to be changed by the newly approved Constitutional Treaty. Even if the treaty does not come into force, the political will now exists to formalise the eurogroup’s activities. As all the EU governments have agreed the treaty, none can reasonably complain about the eurozone members proceeding with the “enhanced co-operation” that was sanctioned by the Nice Treaty. In any case, increased co-operation among the eurogroup members could take the form of inter-governmental activity and be outside the scope of the EU. However, under the draft treaty provisions, the eurogroup may “strengthen budgetary discipline and surveillance” as well as “set out economic policy guidelines”. These provisions open the door to wide-ranging co-operation that could readily include some relevant tax harmonisation. Shared history Since the eurogroup started in 1999, its influence has been significant but has not advanced in the way that seemed likely at the outset. Partly, that reflected a reticence to upset the ‘pre-ins’ (those on track to join EMU). Will that constraint wither away, especially if many of the accession states do not participate? Broadly, the conditions for EMU entry are that a state must be a member of the exchange rate mechanism (ERM), have sound public finance, low inflation and an independent central bank. So far, only Estonia, Lithuania and Slovenia have joined the ERM. The Ecofin Council recently determined that six of the new member states had an “excessive deficit” in their public finances and that five had such structural problems that the deficits would only be corrected in the medium term. This implies that no early entry to EMU is likely, unless states wish to make a particular effort to rectify their public finances. The ratification process for the new treaty may turn out to be a bifurcation in attitudes. Non-eurozone members that fail to ratify may find it correspondingly hard to muster the political will to join EMU. That could be a turning point in the eurozone members changing a categorisation from ‘pre-in’ to ‘long-term out’. Certainly, it is no longer sensible to regard the UK as a pre-in. That leaves the eurozone members with a dilemma: to wait for the outs to join or to get on with their own needs. The dilemma is unlikely to last long: the draft treaty permits measures to ensure the euro’s success and secure its place in the international monetary system. These are not subjects that the eurogroup will wish to postpone indefinitely. The reactions have appeared immediately: the proposal to appoint a eurogroup president has been postponed but newly re-elected Luxembourg prime minister Claude Juncker seems to be the favourite for the post and will be in office in Luxembourg long enough to have a major influence on the group. French finance minister Nicolas Sarkozy has expressed strong views about the need for the eurozone to develop its own economic governance and his view may be particularly important if he becomes president of France in 2007. The role of the accession states may be pivotal in these developments. If a significant number become long-term outs, the eurogroup will have no alternative but to develop its arrangements to maximise the benefits of EMU for its own citizens. Under the new treaty’s definitions, even if only the new ERM members join EMU, the eurozone will always have a qualified majority vote on Ecofin, enabling the eurogroup to drive virtually all aspects of its own collective economic policy. So, a new economic power bloc may crystallise in the few years following the attempt to ratify the new treaty. Graham Bishop is a consultant on European financial affairs