The new (non-constitution) reform treaty for Europe: how will it affect economic policy?

The heads of states of the 27 countries in the European Union met in Lisbon last week to iron out the remaining differences on the new reform treaty. The new Lisbon Treaty is scheduled to be signed on 13 December and is essentially a downsized version of the EU constitution rejected by the French and Dutch voters in 2005. The negotiations went remarkably smoothly with only the customary wrestling with the Poles, up outs to the Brits and a few rounds of give-and-take across the board.

The question is now, how the new treaty will affect economic policy making in the European Union. The last time the EU head of states met in the Portuguese capital was in 2000 when they agreed upon the Lisbon Agenda, which called for economic reforms with the aim to “make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world”. Not much has happened since then in spite of the process being “restarted” in 2005. The EU is still overregulated, protectionist and over-endowed with old industries, while falling behind in international comparisons.

The new treaty seeks to streamline internal decision-making and to give the Union more clout internationally. A new president of the European Council is going to be elected for two and a half years at a time, replacing the previous system of semi-yearly rotating presidents. A High Representative for foreign affairs will get money, a diplomatic corps and the post as vice-president of the Commission. New voting rules and additional limits on the national veto will be phased in over a period of time. The number of commissioners will be cut, while the Parliament gains more influence in some areas. The treaty also calls for increased cooperation on issues concerning energy supply and climate change.

A main factor behind the Constitution and hence the new Lisbon Treaty is a perceived need to ensure the functioning of the Union after expansion from 15 to – at the latest count – 27 member countries. It is unclear whether this motive bears much weight in practice. The experience is that the expansions in 2004 and 2007 have not paralysed the EU’s institutions or decision-making. On the contrary, it has been argued that the extra faces around the negotiation tables have actually disciplined the hitherto talkative representatives from the “old” EU countries.

The strengthening of the executive powers as witnessed by the new posts as President and High Representative for foreign affairs may be a bit of a gamble. In particular, it is not clear whether the EU possesses check-and-balances to restrain possible abuse of power. With its colonial past and tragic history in the 20th century and with diverging interests across the Union, it seems challenging to devise a sensible foreign policy for Europe.

Returning to the economic consequences of the Treaty, one can see both a glass half full and a glass half empty. The half full view will be based on the argument that with the agreement on the new Lisbon Treaty, the disappointment of the Constitution can be put aside, so that the attention can be directed towards economic reforms that matter for peoples’ lives. This could lead to a new momentum for reforms of the Common Agricultural Policy, a more positive role of the EU in the WTO negotiations on liberalisation of world trade, new steps to get the Lisbon process back on track, etc.

The half empty view will start from the last minute editing of the treaty text in Lisbon, where French president Nicolas Sarkozy had removed the sentence stating that competition in the internal market of the Union should be “free and undistorted”. The treaty does nothing to address the tangled bureaucracy and waste of resources in the EU. The moving circus of the European parliament will continue, the three parallel working languages will remain and the accounts will remain murky.

Time will show which one of the views that is closest to reality. Overall, the new reform treaty is unlikely to affect economic policy making to any larger extent, with the possible (but rather unlikely) exception of the EU taking steps towards a common energy policy. The new Lisbon Treaty is unlikely to kill the Lisbon Agenda, but it does nothing to fundamentally alter the dynamics of economic policy formation within the Union.

The biggest concern is perhaps that the reform treaty does not address the most important issue facing the European Union, namely its democratic deficit. For most Europeans the Union is still a faraway bureaucratic “machine”, with which they do not engage themselves. The treaty does little to address the difficult question on how to foster participative democracy in a Union with half a billion inhabitants. That countries in periods will have no commissioner is not likely to strengthen the links between the EU and its inhabitants. The European Union will only gain legitimacy if it becomes more democratic – and delivers on its promises of economic progress and social cohesion.

10 Responses to "The new (non-constitution) reform treaty for Europe: how will it affect economic policy?"

  1. Anonymous   October 23, 2007 at 12:28 pm

    >> “The EU is still overregulated, protectionist and over-endowed with old industries, while falling behind in international comparisons” You shurely have data to back this claim up. It will be very interesting to know in which areas Europe is falling behind and where it is not and why it lead you to stated conclusion.Mr. Roubini, as editor I would expect from you some quality check on content published in RGE.

  2. Vitoria Saddi   October 23, 2007 at 12:47 pm

    Dear anonymous, If you are so brave and so critic about the above piece why don’t you add your name? An honest intelectual discussion is healthy but it goes both ways: you present your arguments and the above author present hers. Nouriel Roubini is a intelectual who, most of all, praises academic integrity and freedom of thought. Even if he disagrees with one’s view he never prohibits anyone from expressing their opinions. This is why RGE Monitor is the best Economics site in the world. Best regards, Vitoria Saddi

  3. eparisi   October 23, 2007 at 1:36 pm

    Very interesting analysis. Indeed, the democracy deficit within EU institutions is equally reflected in the current debate about the ECB’s lack of formal accountability. By the way: was the ECB in the final Reform Treaty designated an EU institution or as “other Union institutions” in the end? What’s the difference in practice?

  4. eparisi   October 23, 2007 at 2:02 pm

    see e.g. the analysis by Charles Wyplosz “Wake-up call for the ECB: lack of democratic accountability needs to be addressed” [http://www.rgemonitor.com/redir.php?sid=1&tgid=0&cid=203421]

  5. Guest   October 24, 2007 at 6:56 am

    Very good analysis. So do you see the glass as half full or half empty? are you optimistic or pessimistic about Europe, its economic and political development?

  6. Richard   October 24, 2007 at 6:57 am

    How could the EU address its democracy deficit? Do you have any specific proposals to address this problem?

  7. Anonymous   October 24, 2007 at 7:25 am

    Dear Victoria,I could be cowardly as I wish so, fact is that you do not addressed my argument. The article itself is only talking points and ideology not facts or analysis. RGE is my favorite econo reading destination, because until now most posts were data-based. If author is pandering to certain readers with such grandiose claims as:/*The EU is still overregulated, protectionist and over-endowed with old industries, while falling behind in international comparisons*//*On the contrary, it has been argued that the extra faces around the negotiation tables have actually disciplined the hitherto talkative representatives from the “old” EU countries.*//*The treaty does nothing to address the tangled bureaucracy and waste of resources in the EU. The moving circus of the European parliament will continue, the three parallel working languages will remain and the accounts will remain murky.*/she (or you) should back them with some data or expect to be laughed on (even by anonymous cowards).I was under impression that article was written by freshman student, journalist etc, so after checking author profile I was really really sadly surprised.RegardsJozo Polomsky

  8. Nouriel   October 25, 2007 at 1:51 am

    Jozo, these blog items on RGE are not academic essays but rather shorter pieces of an op-ed style where authors do not necessarily provide all the facts and data to back up their arguments. So I happen to agree with most of the statements made by Prof. Staehr as there is plenty of evidence about them. Your tone is rude and insulting; if you disagree with specifics say why but we are not going to allow ad-hominem personal insults (“article was written by freshman student”) in this venue. So stick to the substance and avoid any personal insults here; period. Nouriel

  9. Karsten Staehr   October 25, 2007 at 5:21 am

    To Anynomous / Jozo Polomsky: I am happy that my piece interested you and made you think about the developments in the EU. I will during the next months contribute pieces that discuss some of the elements in more detail, e.g. the CAP, the EU’s role in the WTO negotiations and European energy security. Stay tuned!To Guest: I guess none of the predictions can be ruled out. My hope is that Europe will drop the CAP, remove trade restrictions and setup a joints energy security policy. Such steps will harm “national champions”, but may be feasible if there is public pressure in that direction. To Richard, cf. the democracy in the EU: I have been thinking about this issue but not really come up with anything sensible. The piece stemmed from my frustration that the new Lisbon / reform Treaty was decided very fast and without discussions of what really matters for people most, namely democracy and economic results. (On the contrary, the Lisbon Treaty is designed so as to avoid referendums in the member countries.) When the EU was merely a trading block the “finer details” with respect to democratic governance and economic reforms were rather unimportant, but with increased integration, these issues ought to take centre stage. One can only hope that this will indeed happen. Meanwhile, we ought to think away of creating institutions that foster participatory democracy for half a billion people.

  10. Anonymous   October 25, 2007 at 5:45 pm

    Mr. Roubini, Yes maybe I am rude and insulting, however I would say that calling european parliament “traveling circus” or people like Mr Kohl “talkative” could be perceived as both silly and insulting as well.The statement about Europe falling behind in international comparisons is simply not true. As I learned (on your site) Germany and Finland are only examples of the old industrialized countries with exports as growth engine.As I learned elsewhere, France is one of few countries in a world prepared to weather peak oil, with very high quality of life and top-notch healthcare system.As you know, most new Europe countries (including Estonia) stabilized their growth rate at 6-8% since joining EU. I do not see similar results in Mexico after joining NAFTA.I observed euro to become reserve world currency number 2 in just few years.As for democratic deficit – I could see from developments in software patent discussion that it is not as bad as some wanted us to believe. On personal note, I have to acknowledge some logical sloppiness on my side. Reading the op-ed I draw a conclusion that author is one of the unregulated market cultists. It couldn’t be said with 100% certainty, however I still operate under this assumption.Unregulated market cultists have few preconceptions which they present as facts and of which most are probably not true.They believe in small taxes which will foster growth and generate increase in government revenue, they claim that privatized healthcare will operate better thanks to the “market”, they want to cut welfare as it should improve life of ordinary people by forcing them to behave more responsibly, they want to sell off public owned utilities.They dominated public discourse in many European countries and are using exactly the same language as Mr. Staehr is using. In person Mr. Staehr is most probably gentleman with great intellectual depth, however he is spreading dangerous mistaken ideology from 80 which could damage lives of one generation of Europeans. To borrow from his colorful style i could say: “On the other side of Atlantic an pathetic experiment in unregulated markets know as Bush administration is currently going down in flames, and I do not see any reason for Europe to follow the suit. Europe is much better prepared to withstand coming external shocks that any other world economy, and so called “reforms” will only destroy Europe’s ability to survive economic and political storms. Why get to the level of Marginal Revolution, only because, by reason unknown to me, you are very critical of EU? As someone who participated in most spectacular positive reversals in government finances, how could you support the people spreading the same ideas here which were used there to squander results of your work?”As Im not really good in this style I am going back to reading articles about german recovery or china reserves, where I maybe could disagree with conclusions, but by unknown reasons I am not losing my temper as when reading Mr. Staehr op-ed. RegardsJozo