EU president confounds expectations, draws up radical reform of managing Europe’s finances

EU president pushes for economic power

BRUSSELS — Will the European Union use Greece’s debt crisis to claw more economic power away from its member governments?

With the euro shaken by fears of a possible Greek default, the European Union’s new president is seeking more authority over the economic sovereignty of its 27 members — which could limit member’s spending on welfare and curb worker protection.

Such a push, eating into the economic sovereignty of its 27 members is sure to draw opposition.

It is a bold move for the unprepossessing President Herman Van Rompuy, a relative unknown whose ascension to the post last year was widely greeted with a yawn and as a signal that Europe was not prepared to choose a major figure who could outshine French, German or British leaders on the world stage.

Van Rompuy says, Europe can no longer afford to pay generous pensions, health care and unemployment — the spending that, especially with aging populations, has built up heavier and heavier levels of government debt, made worse by paying out hundreds of billions of euros to bail out banks and stimulate recession-plagued economies.

Van Rompuy is drawing up a blueprint for the way European countries manage their economic affairs, proposing that the EU get involved in planning national policies and ensuring they are carried out.

Governments are unlikely to yield power easily to a central authority, and rejections of a proposed EU constitution by French and Dutch voters in 2005 showed popular suspicion of the EU — as did a 2008 No vote by Ireland to a scaled down version, the Lisbon Treaty, which was reversed in a second vote last year and then entered into force on Jan. 1.

Still, Van Rompuy apparently believes a window for major reform has been opened by the Greek debt crisis, which has undermined the euro and has shown up the EU’s inability to coordinate government spending among the 16 countries sharing the same currency. Large deficits can undermine a currency, so members agree to limit them to 3 percent of economic output.

Those rules have been routinely flouted, even by major nations like France and Germany. The EU has done little to stop its members or punish them when they ran up huge debt, even as the world headed into a global recession.

“The long-term outlook is not bright,” Van Rompuy said last month, warning of more years of sluggish growth and high joblessness that could see Europe slip even further behind the United States and China.

In an unpublished paper distributed to governments last week, a copy of which was obtained by The Associated Press, Van Rompuy suggests a new regime of stronger “economic governance.” Brussels would have more oversight over how member nations run their economies, going far beyond its current authority to supervise budgets.

Although the ideas were vague — more details will come next month — Van Rompuy proposes that the EU draw up a set of five common economic targets, then tailor them for each country. EU experts would monitor the goals, which would be linked to EU funding and loans. Noncompliant governments may be “named and shamed,” which could affect their borrowing on bond markets.

As the Greek crisis showed, the first sacrifice on the altar of austerity may be the social benefits which many Europeans have come to see as a birthright.

Greece, which falsified statistics to cover up its massive deficit, has been ordered to cut back state pensions and health care costs and already has frozen public sector salaries.

The EU-ordered cutbacks prompted huge public protests. Prime Minister George Papandreou complained that his country’s sovereignty had partially been lost, but urged his people to swallow the medicine.

“It is criminal, and we must earn it back with our credibility, with our program, with the sacrifice of each person,” he said.

On average, Europeans work fewer hours than most people, retire earlier and often get excellent state health care in return for high taxes. But Europeans are getting older, and fewer younger workers are moving into the labor force to pay the bills for the good life.

Unemployment benefits can also support consumer demand and thus economic growth — serving as “automatic stabilizers” in the recession.

“I’d like to see a recognition that Europe’s social structures have been the thing that have stopped us from running into depression: welfare states, public services, high public spending, the stimuli spending,” said John Monks, the head of the European Trade Union Confederation.

But confronted by rising debt, many countries are cutting back. Spain plans to hike its retirement age from 65 to 67, as Germany already has, and Greece would raise the average retirement age from a generous 61 to 63 years. France also want to retirees to quit later.

Van Rompuy, a 62-year-old former economist and center-right politician, occupies a new post with uncertain powers. An uncharismatic Belgian politician, he was chosen last November as the first EU president, with few expectations, after the Lisbon Treaty established the post to accelerate EU decision-making.

Although they are likely to be softened, his ideas are finding some resonance.

German Chancellor Angela Merkel and French President Nicolas Sarkozy also have called for “improved cooperation” on financial policy among EU states, but they are likely to agree to only so much. Some troubled countries — Spain and Italy, for example — might welcome outside help.

“We are not very happy with the way our economy is being managed,” said Javier Diaz-Gimenez, economics professor at IESE Business School in Madrid. “Spaniards understand that we are facing troubled times and they understand things need to be done.”

An EU push also could help Italy, says economics professor Pier Paolo Benigno at Rome’s LUISS University.

“Relinquishing our sovereignty on public spending might be good,” he said, noting very little progress by either center-right or center-left governments to rein in public spending and improving accounts. “Perhaps tying our hands with Europe would discipline our policy makers.”

Economists have been pressing Italian governments for years to restructure the pension system, but no government has yet managed it in the face of union opposition.

Nicolas Veron of the Bruegel Institute, a Brussels-based economic think-tank, says the Greek problem has raised issues of trading sovereignty for greater stability, and believes the euro countries are likely to consider greater integration.

“The more crises you have, the more you will have moments where you will have tradeoff of sovereignty,” he said.

But Sarah Gaskell, of Open Europe think tank, sees Van Rompuy’s move as “a power grab.”

She said he was exploiting the current troubles “to push forward economic integration in a way that’s not necessarily transparent.”

Associated Press writers Colleen Barry in Milan, Elena Becatoros in Athens, Daniel Woolls in Madrid, Angela Charlton in Paris and Melissa Eddy in Berlin contributed to this story.