18 January 2012
The direction of travel set out in the new fiscal compact is at best redundant and at worst dangerous
Next week, European finance ministers will waste precious time in an attempt to work out the final details of a useless treaty. It will bring nothing new, but minor pledges to appease Germany's stingy and short-sighted decision-makers. The new fiscal compact split the continent and pushed the United Kingdom away from the core group of the European club, opening a dangerous wound with unpredictable consequences. What are the advantages of such a divisive move, so strongly advocated by Berlin? "The new treaty does not introduce significant changes to the functioning of the European Union," a senior diplomat, who prefers not to be named, admits candidly to PublicServiceEurope.com.
Indeed, most of the provisions of the fiscal compact are included in the freshly adopted "six pack" that strengthened European economic governance. The set of measures - comprising six proposals from the European Commission negotiated in the middle of the crisis - already introduced tighter fiscal discipline in eurozone countries; exposing wrongdoers to concrete sanctions and fines, and rapid procedures for sanctions. "The surprising thing is that all this was done already with the six-pack legislation," says Jean Pisani-Ferry, director of the influential Brussels-based think tank Bruegel. "This new treaty is essentially repeating what was already in that legislation, with some additional changes, but nothing of major importance." Among the minor changes envisaged, the fiscal compact introduces a so-called "golden rule", which will prevent member states from running negative budgets.
Many experts question the usefulness of such a draconian approach. Public deficits have been used in the past for key long-term investments and have turned depressions into magnificent and long-lasting economic recoveries. Such Keynesian expansionist economics was the basis of the two decades of growth experienced by the western world after the Second World War. It is almost paradoxical, therefore, that the only concrete new element brought forward by the new treaty is a unilateral ban on such policies in the future. Especially, in a continent which suffers from a chronic sluggish growth. Nevertheless, and in the long-established tradition of the European club, important derogations are allowed. Member states will, in fact, be permitted to "temporarily deviate" from the golden rule "in case of an unusual event or in periods of a severe economic downturn" - according to a draft text. The vagueness of these clauses leaves room to say that the application of the entire new provision is at stake. Fortunately, some might say.
The compact also adds an obligation to include new stringent budgetary rules into national legislation, "preferably at constitutional level". But the introduction of these binding commitments is a reason of concern for states, which have no constitution or for those who are prevented doing so by their very founding texts. Finance ministers, due to meet in Brussels on January 23-24, will probably scramble on this point. It appears likely that new derogations will be introduced - which brings us back to the original question: Why does Europe need a new treaty, if its provisions carry no new elements? Appeasing German conservative politicians and their electorate is by no means a sufficient reason. Although, sadly it seems to be the only one.
Supporters of the new treaty argue that it contains, albeit only in its preamble, a new powerful deterrent to fiscal profligacy. The document states that only countries abiding by the new tighter rules will be able to have access to the European rescue fund. The introduction of binding national rules on fiscal discipline "shall be considered as a condition for the granting of assistance under the European Stability Mechanism," reads the draft. Once again, opposition to this German-crafted requirement is significant. "It remains to be seen in which practical terms this condition will be applied," an EU official says.
Another disputed issue concerns the new role envisaged for the European Court of Justice, which could be called to rule on excessive deficit procedures started by the commission against member states. Those breaking the golden rule might face a legal condemnation from European judges, in Luxembourg. Yet again, this outcome is far from certain. The main critic of this provision is the UK, which deems it legally unsound because the new pact is not an EU treaty. It is an intergovernmental agreement. Therefore, it should not rely on the European Court for its enforcement. Finally, the treaty leaves open the thorny issue of who should participate within the newly institutionalised euro summits. Will EU members outside the eurozone be included, if only as observers? The draft treaty does not shed any light on this debate.
Above all, what the treaty is really missing are the measures that could quell the markets and restore confidence in the eurozone. Eurobonds are still taboo in Berlin and so remain out of the question. Strengthening the eurozone rescue fund is another issue that has been left untouched, as has the problem of the excessive interdependence between banks and sovereigns. In such dire condition, it should not be surprising that the rating agency Standard & Poor's downgraded most eurozone countries and its temporary rescue fund the European Financial Stability Facility. It was a move that was largely anticipated by the markets, which actually rose after the announcement. It all amounts to desperation and European leaders seem determined to continue barking up the wrong tree.