Changing Tides for Country-Specific Recommendations on Finance?


Why you should be aware of this underrated policy tool?

On 18 May, the European Commission adopted its yearly country-specific recommendations that are expected to be passed by the European Council at the end of the month. Rooted in the Treaty on the Functioning of the European Union (TFEU), these recommendations provide non-binding guidelines for Member States to improve their economic prospects and alleviate unemployment. Their non-binding nature has previously allowed Member States to ignore and ridicule the gist of the recommendations. The recent rates of full and partial implementation below 10% and 40%, respectively, reflect this trend.
In a recent hearing, however, Vice-President and Commissioner for the Euro & Social Dialogue, Valdis Dombrovskis, underlined how seriously the Commission treats these recommendations—and understandably so. After all, they are the result of intense debates between the Commission and Member States, but increasingly also between Member States in the Eurogroup and ECOFIN fora. Such economic policy coordination is instrumental for a successful Euro and these recommendations could facilitate that process. Therefore, in light of the current political environment of polarizing populism and isolationism, Dombrovskis remarks can be seen as an appeal to economic reality as well as the European spirit—the desire and need to work together and help each other. At the end of the day, the EU is only as strong as its weakest link, and all members must push for reform if the Union wants to achieve progress on its three self-declared priorities to ‘boost investment, ’to continue structural reforms’, and to ‘further implement responsible fiscal policies.’
Coordinatio non dictata. This is the motto of the Commission’s approach to the country-specific recommendations. They are based on the current economic environment in the individual Member States as well as the macro objectives that have been set by the Member States and the Commission for the EU as a whole; hence, they intend to ensure a degree of coordination, rather than ‘dictating’ policy. This consideration is particularly relevant because it acknowledges the interdependence of the European economies and the necessity for a joint effort to escape looming stagflation.
Against this background, the Commission should be applauded for the ambitious nature of their recommendations. They aim to fight tax evasion, balance budgets, strengthen the banking systems, facilitate labour market access for the long-term and youth unemployed, improve transparency of judicial systems, and increase female labour market participation. No less.
In terms of financial services, the Commission is committed to making the Single Market ever more attractive for investment via its two-headed approach of labour market and economic reform suggestions. Parts of the Capital Markets Union initiative could also find implementation via these recommendations, rather than via “traditional” EU policy making. To name a few, in France they have suggested to de-regulate the business services sector in France, while allowing investors in Italy to purchase non-performing loans, which, with a value of €337Bn, make up 18% of the total amount of loans. In Germany they recommended to streamline the tax system, and facilitate venture capital given the common lack thereof. In 2014, venture capital investment compromised 0.023% of GDP in Germany, but 0.28% in the United States which makes this last point particularly relevant.
These reforms follow a clear macro-economic agenda. From a longer term perspective, these recommendations have the potential to create significant financial opportunities. Non-performing loans are a drag on bank lending and, enabled by policy, can be a worth-while investment in a low-interest rate environment like the current one. Venture Capital is also crucial for innovation. Economies with ageing populations, like Germany, for example, are dependent on maintaining their competitive advantage by being at the cutting edge of technology for which capital market funding is crucial. Now, how do you reconcile this logical economic reasoning with some MEP’s accusing the Commission of dictating unnecessary rules? One cannot.
The Commission’s recommendations are sensible beyond any doubt and are mostly based on analyses conducted by Member States themselves. Legislators would do a good deed in introducing these insights into their policy. It could bring Europe back to old strength—and that would benefit everybody. Businesses are hence well-advised to keep an eye on these recommendations.

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