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Being a member of the European Union can bring great benefits, but it also implies responsibilities, especially for those member states that are part of the Eurozone. They have new obligations to others for financial stability; they cannot carry on purely looking out for themselves
—Dean Westcott, president, ACCA

Politicians, accountants and finance experts from both the public and private sectors gathered recently at a high level event organised by ACCA (the Association of Chartered Certified Accountants) as part of its President’s Debates, hosted by ACCA’s President Dean Westcott

Held in the Bibliotheque Solvay in Brussels, the distinguished experts discussed how to strike the right balance between discipline, accountability, growth and solidarity to meet the economic governance challenges ahead. The main outcomes of the meeting were:

  • We need put an end to the spiral of unsustainable public finances and to the loss of competitiveness. But if discipline and political will from all member states and EU institutions are necessary, it is not enough to focus on short term indicators of success and 'austerity' measures alone.
  • It is vital to restore trust, namely through a better national accounting system based on accruals for more sustainable public finances and a better narrative. 
  • This must be accompanied by tackling better the issues that are of greatest concern to EU citizens, such as working towards robust plans for sustainable growth and jobs’ restoration and creation. 

The meeting was held within the framework that the economic and financial crisis has revealed a series of weaknesses in economic governance throughout the EU. The EU institutions and its member states have therefore taken a series of important decisions aiming to strengthen fiscal, economic and budgetary coordination for the EU as a whole and for the euro area in particular. However if budgetary consolidation and sustainable public finances are crucial, it is vital to further discuss and implement concrete growth and employment measures, which are noticeably absent from the current initiatives.

Rolf Alter, Director of Public Governance and Territorial Development Directorate at the OECD said: 'In the aftermath of the economic crisis, the state of public finances across OECD member countries has worsened considerably. In order to stabilise or reduce debt-to-GDP ratios to prudent levels, most OECD member countries will need to undertake substantial fiscal consolidation measures. Creating public understanding and support for restoring fiscal sustainability through deficit reductions is hard, but not impossible. An OECD survey reveals that the values that are considered as determining for a sustainable public finances are impartiality, legality, efficiency and transparency. 

'Governments and public administrations are exposed to a set of expectations not necessarily easily compatible with each other: if you really follow efficiency you might not necessarily be impartial, and if you really want to be efficient you may have to make sometimes decisions, which are not shared by everybody.

'Institutional transparency is not a moral value, it is about efficiency in the sense of evidence that need to be introduced to make informed quality decision-making.

'There is a clear lack of understanding and buy in at the level of European citizens. We should face a reality: this is not the fault of the citizens, but rather the fact that we have been making it a political union of politicians, instead of a political union of political citizens, who don’t think they have been part of the story.'

Fabian Zuleeg, chief economist at the European Policy Center indicated: 'The only way out of this crisis is to have further integration with real decision making power at the European level. We have to make a distinction between austerity and fiscal consolidation, as too much austerity can lead to a deterioration of public finances. Exclusive focus on public finances and on austerity cannot be a sustainable approach; we need to look at the long term durability of the economies concerned. 

'In the eurozone, we are experiencing this crisis because we have a single monetary system but a fragmented political system. In addition, we are talking about the growth problem in Europe as a whole, but we forget to talk about the divergence in growth between worst performing countries and best performing countries. If we want to avoid countries dropping out of the democratic system, we need to allow these countries to ringfence certain expenditure in some areas - as Finland did with its education budget in the 1990s - and help them attracting private investment and public investment , through a 'new deal'. We should envisage a 'collateralisation' of debt and take these countries away from market forces that are destroying them.'

Philippe Peuch-Lestrade, Partner at Ernst&Young explained: 'To improve budget orthodoxy and sustainability of public finances, which are the heart and blood of democracy, the three 'Ts' are crucial: trust , transparency and transformation of public finances.' The cause of public spending is rooted in democratic governments, willing to reward voters but are confronted to social security and healthcare expenditures linked to rising standards of living, longer life expectancy and declining birth rate, which are going faster than the GDP growth. The gap cannot however be closed by raising taxes or only reducing wastes without risking the death spiral.

'Most of the current national accounting systems do not include the cost of future policy governance and commitments, though we need clarity on the numbers. This is a key issue we have to solve, governments should know what is the cost to produce services and how these should be financed, as they should know what assets are worth and what are the liabilities. We do not have sufficient reliable and quality data to protect investors and ensure stability of financial markets, nor restore trust within citizens. 

'For a better budget efficiency and a better decision making, it is urgent to change member states’ bookkeeping and accounting systems. The public sector need to shift from a cash to accruals based accounting model, subject to an independent audit, to ensure the same level of transparency and accountability than for the private sector. It is also instrumental for the intergenerational equity.'

He was echoed by Alexandre Makaronidis, head of the unit GFS quality management and government accounting at Eurostat, who added: 'We need further harmonisation, if not integration, of public sector accounting systems within and across member states, throughout the European Union. The quality and transparency of the policy and decision making heavily depend on the quality of the input data. Accrual-based public accounting improves governance, transparency, accountability and comparability in public sector accounting. It would also facilitate harmonisation and comparability as well as improving efficiency and effectiveness of public sector audit.

'However the implementation of the harmonised accrual-based standards in EU member states could lead to reluctances from some member states, both linked to its substantial costs, not easy to address given the current constraints on resources, and also due to the different national legal traditions. Eurostat is undergoing an assessment of the suitability of introducing International Public Sector Accounting Standards by the end of 2012 and looks forward to receiving stakeholders contributions to the ongoing public consultation on the issue. The outcome of this assessment will determine the need for the possible development of a legislative proposal, including concerning EU Governance of the process of adoption of standards. The assessment will cover whether IPSAS could be applied in its pure form or if, for example, we should move towards a more European version of the standards.'

For Elisa Ferreira MEP, 'The present crisis did not start with a sovereign debt crisis, but started in financial markets. It is a mistake to believe that strong countries have a moral right to teach and punish the weaker ones, which have no margin of manoeuvre for anything. It is important to take into account that the EU does not have a federal system but consists of 27 countries with national sovereignty, and to change narrative when communicating about member states. Using adjectives such as virtuous or lazy is not only technically wrong but poisonous for the future.

'We have taken a political decision to put together strong and competitive economies with weaker ones and to adopt a common single currency, knowing that it could increase divergences between them. These decisions have created two vicious circles - one is the choice whether to save countries or banks, which are interconnected, and the other is the recession measures imposed everywhere without stimulating growth. We now must find a solution to deal with these huge imbalances. 

'At present, the EU growth strategy is close to zero in practical terms but there are some elements we should immediately put in our agenda to address these imbalances. To start with, we need to continue the ongoing regulatory reforms of financial markets to address banks and their crisis management; second, we should put in place a "Marshall plan growth agenda" with the support of the European Investment Bank, coupled with the emission of EU budget-backed project bonds. We also need a clear protection of sovereign debt to release countries from the pressure of speculators. The European Central bank should ensure that the monetary easing comes to real economy, as putting this institution with the only target of controlling inflation is absolutely outdated.'

The Chair of the debate, Dean Westcott President of ACCA concluded: 

'Being a member of the European Union can bring great benefits, but it also implies responsibilities, especially for those member states that are part of the Eurozone. They have new obligations to others for financial stability; they cannot carry on purely looking out for themselves. 

'However, co-ordinated fiscal discipline shouldn’t mean co-ordinated fiscal straightjackets. Europe needs a plan for growth, albeit a responsible one. A re-balancing of books and austerity drives may be necessary in the short-term, but they will only be positive if they are a means to an end rather than an end in themselves. Europe needs a plan for turning austerity into a platform for growth, employment, and competitiveness. To achieve this, national budgets as well as the EU budget need to be geared towards investment in areas that will deliver growth and employment in the future; areas where Europe has an edge: new technologies, telecommunications, green energy, and the digitalisation of our economy.'