Once more with added austerity? How they looked happy in 2007 when the signed off on the Lisbon Treaty. Little did they think they could be back at it again in 2012 or 2013, and we could be voting on again…for the third…or maybe even a fourth time?
Another big EU Treaty?
That seems to be the position of the French and Germans based on press statement over the last weeks (see: http://www.bloomberg.com/news/2011-11-28/merkel-spurns-bazooka-in-favor-of-fast-track-eu-treaty-change.html ). There are 3-4 rationales associated with this idea, none of them particularly sound in my view.
Firstly there is a general argument that tough stability rules are needed to make the Eurozone work and an admission that previous convergence criteria rules in the Maastricht Treaty were not tough enough. Future rules on budget deficits and debt levels may take the form of automatic sanctions, imposed by the Commission presumably, on any offending nation in the Eurozone.
Problem: This legalistic argument may or may not be valid (the downside of tough strict rules is that they lead to inflexibility and during a severe recession or national emergency it may make sense for any national government to have the freedom to run a large budget deficit). In any event its like arguing that sprinkler systems should be mandatory while a large building is on fire. It does nothing too fix the inter-related banking crisis and the sovereign debt crises.
Secondly, it is clear that the Germans are linking a demand for conditions over national budget spending via a legal stick to control spending with any assumption of common debt financing-Eurobonds. They are saying if you want Germany to help raise money for other countries via common debt instruments then we must have a say on how you spend that money.
Problem: That might seem fine put that way, but in practice the devil is in the detail. How much say? Just the broad brush of deficit levels and debt to GDP ratios, or would there be a right for the Commission to go through a budget line by line and strike out particular budgetary provisions that they deem ‘excessive’? One would assume not the latter, but then how effective will such measures be if they do not really have the teeth to get into national spending in countries like Greece or Ireland?
Yet, relatively small and detailed fiscal changes can over time lead to larger implications for public borrowing and debt. For example increasing pensionable ages to 68 across the entire Eurozone might dramatically reduce long term fiscal liabilities but that would be getting into to very different national pension regimes. Also, there is a logical and ethical problem here; why should other Eurozone members have rights over a national budget exclusively in a negative sense, but not also have a positive duties to help out another member states in distress-to give them transfusions of cash? If Germany for example suffered from a localized recession, but the German government refused to take positive fiscal measures to reflate the Germany economy, would not the Eurozone as a whole not have a right to demand that measures were taken to boost German demand…in part because it would have knock on effects on the rest of us?
The logic of any fiscal union, however minimal, must cut both ways: all members police each other to make sure nobody is spending too much or too little, but all members are obliged to look after and pay for each other as well-at least to some extent? Sooner or later that logic will creep into any fiscal union.
Finally of course there are very different economic theories about appropriate budgetary cycles-and most economists inspired by Keynes would adhere to the view that in a savage depression the last thing one should do is prohibit heavy borrowing or running a deficit. Equally during the good times, there may be a need to be ‘counter cyclical’. If you remove this flexibility from the nation states, how can they respond to any future recessions? Either there is a rule that each nation state keeps sizable contingency funds, or some type of centralized Eurozone wide contingency fund to help meet sudden current spending deficits would sooner or later become logically needed. The problem with fiscal union, is once your in for a penny, your in for a pound.
Thirdly, its not clear how much of this ‘stability zone’ plan is really an attempt to split the Eurozone into a more manageable ‘hard currency’ area and a sin bin of countries like the PIIGS, who can then be organically allowed to emerge….each peripheral states like Ireland or Spain would have to decide how badly they wanted to be in the Eurozone…they would then have to accept financial and budgetary discipline set by some collective Eurozone body…perhaps within the Commission…perhaps in the ECB……or some other agency. States that either could not meet the tough conditions or were not prepared to do so, would exit the Eurozone.
Problem: The theory seems to be that amputation is the best way to stop the spread of a contagious disease. It may do this but may well also kill the patient! In fact, a new core Eurozone runs a risk of becoming competitively disadvantaged by being overvalued-something which German exporters complained about the old DM in the 1980s. As it became more valued and respected its rate of exchange with other currencies appreciated and that meant in relative terms German exports began to look a lot more expensive outside Germany. So the conclusion here is ‘be careful what you wish for’.
Once again this solution does nothing to address the massive (bad)loans which French and German banks gave out to the various PIIGs countries and governments-except there would now not only be a risk of default, or haircuts to be factored in, but even if the PIIGs keep paying their loans back they may well be doing so in a different currency. A crucial question is whether loans that Irish banks borrowed from German banks in Euros would be re-dominated into Irish punts…or whether they would remain on the Irish banks’ books as loans to be repaid in hard currency Euros but funded from Irish borrowers who would be using a weak national currency perhaps?
A new cost of currency risk would therefore enter into calculations about the rate and extent of bad debts which threaten to sink European banks.
There is also the political cost, that would attend here. States such as Greece, Portugal and perhaps Ireland, who all might not qualify for Core Eurozone membership would bitterly resent their de facto expulsion. It would be naive to think the political fall-out of a two-tier Europe would be predictable or benign. Some of the peripheral countries may well transform from being essentially pliant and consensual member states, to being very awkward nations, which might make the British look reasonable.
Fourthly, perhaps the whole thing about major Treaty reform is just a gambit? After all the chances of ALL 27 nation states agreeing to a major revision of the Lisbon Treaty cannot be that good. So maybe by adding the requirement for a major Treaty change Merkel just buys time, courts domestic opinion, which likes the idea of forcing state like Greece to be fiscally responsible. Much of the strict rhetoric by Merkel and Sarkozy may be merely a ruse to pave the way for a two speed Euro zone (and even two speed EU)…..after all banging on about Irish Taxes is surely the right way to get the Irish to vote down the seemingly inevitable referendum…which may be what the French and Germans really want us to do?
Problem: we do not have time for a time delaying exercise or a major treaty reform.
Equally, the obvious could well happen after a long period of time-say 12 months from now. Some EU state will simply fail to ratify any such new Treaty. It could easily be Ireland, or even non-Eurozone Denmark. What have we learned from the Lisbon and Nice Treaties debacles? Well major Treaty reform is NOT what ordinary voters want or fully understand. They may well take their frustrations out on the hapless politicians who seek to push such changes, especially in countries like Ireland, where a referendum would seem inevitable. Any changes along the lines of automatic Treaty sanctions would be a major change of the Treaties and would likely fall within the scope of the Crotty judgement. which argued a referendum would be required whenever an EU Treaty had an impact which was likely to “alter the essential character of the Communities”…or “create a threat to fundamental constitutional rights.” It would fall under the first by rewriting the Maastricht rules and the latter because the Oireachtas has under our constitution primary responsibility for any Budgetary process.