Merkozy, Fiscal Compact and possible withdrawal from the Euro

Merkozy, Fiscal Compact and possible withdrawal from the Euro

Merkozy's fiscal compact

The December EU summit has raised more questions than answers:  will the new financial firewall be enough to steady international global markets? Will the new fiscal union rules work and what will it involve? Does a referendum hold any relevance for Irish voters following the Nice and Lisbon outcomes and anyway, with enhanced cooperation, does it matter anymore? Can Ireland withstand increased austerity measures and would we be better off going it alone?

 The Merkozy European duopoly has unleashed a wave of criticism toward Cameron’s veto of a new 27 country EU treaty and because of this, we now have a proposal for a fiscal compact and an inter-governmental treaty – claiming, as it legally has to, that it is nothing but a simple fine-tuning of powers already granted under the Maastricht Treaty.

While Britain’s veto effectively means it cannot be labelled a EU treaty, the Lisbon Treaty ensures that, under enhanced cooperation, countries can adopt the new rules without waiting for other countries to sign up.

Either way, Merkozy have taken EU leadership into their own hands or rather Germany has, with France sticking close to its better-off partner.   On reflection, in Ireland, hard questions must be asked of Lisbon Treaty ‘Yes’ campaigners who claimed the new treaty would deliver better governance and effective management of business with  the appointment of  a President of the EU and a Foeign Affairs Minister.  Recent events have condemned Rompuy to being nothing but a titular head while Catherine Ashton has been invisible.

Critics of Lisbon predicted that there would be a shift in power from the Commission (the traditional defender of small states) to the Council of Ministers and by consequence, domination by the larger countries. Enter France, Germany and Merkozy.

What does a real fiscal union look like in federal states?

Federal fiscal union requires centralised powers of tax collection and public spending.  These powers provide the main mechanisms by which fiscal transfers can be made to the more depressed regions of the state.  The amount of tax collected varies between regions, but expenditure on schools, hospitals and public services remains uniform or even weighted towards poorer areas, so taxpayers in richer regions subsidise poorer ones. Monetary union cannot work effectively without these transfers.

But within the EU, with no fiscal or monetary transfers to compensate, peripheral nations are being forced into repeated rounds of self-defeating austerity in order to survive and pay their debts.  Even the default mechanism of currency devaluation is denied them.  There was nothing in the December summit initiative to relieve these pressures.

The new fiscal model

For Germany, European solidarity means everyone playing by strict economic and fiscal rules and hence, the new fiscal compact designed to hardwire austerity into European law.

Central to the treaty will be the requirement, to be enshrined in national law, to maintain a budget surplus or, at worst, an annual structural deficit of 0.5% of GDP. To put that in context, the Stability and Growth Pact which we’re already committed to, sets an annual deficit ceiling of 3% of GDP. That is 6 times the level that will be allowable under the new compact (the SGPlimits also include debt repayments) and the penalties for non-compliance with the new limits will be far more stringent.

This looks like a recipe for permanent austerity ensuring that those on the periphery are condemned to prolonged economic depression. Just look at the facts:  under the old S&G pact between 1990 – 2008, before the crisis hit, Ireland was able to satisfy the 0.5% structural deficit only once in ten years,,  the same as Belgium, Germany and the Netherlands.  Austria, France, Greece, Italy, Portugal and Spain never once met the target.   There is absolutely no chance that Ireland (or Italy, Greece or Portugal or Spain) will regain competitiveness against an even more competitive and strong Germany in the near future, if ever.

Fiscal compact and degree of intrusion

What is clear is that a common currency cannot operate without a common fiscal policy, and importantly, the means to ensure compliance.

What is alarming is the degree of intrusion envisaged, not only for our national budgets, but for economic policy generally and these include:

  •  greater competitiveness;
  • convergence of economic policies and labour markets;
  • convergence and harmonisation of corporate tax bases;
  • and the creation of a financial transaction tax.

In effect, national budgets will have to be approved in advance by the EU.  The priority will be competitiveness, with a consequential lowering of labour and social protection costs which will inevitably lead to greater inequality between states and populations.

Irish referendum

Talk of a referendum in Ireland is a ‘red herring’.  This deal was agreed by 26 countries following Cameron’s veto and ensures that the 11 weak states will be governed by the six strong ones, led by Germany, operating through Brussels.    However there is one clear caveat, the financial firewall with funding coming from the IMF and not the ECB is fundamentally weak and may have to be revisited in January.

Referendum or no referendum –Ireland is in a weak position with few or no marbles to trade.  But this is the final crossroads and probably the most crucial decision an Irish electorate will ever have to decide upon, should a referendum take place. And it should.

Already the campaign has begun and been framed as a vote for or against the Euro.

As for the sovereignity argument, it has long since gone in the face of international financial institutions , the rating agencies, currency speculators and global capitalism.

The political strategy will be based on winning a concession on Ireland’s corporation tax and a re-calibration or elimination of the €31 billion debt promissory note (borrowed to sort out Anglo Irish and Irish Nationwide).  The most likely outcome is a war reparations style deal where interest is lowered and the loan term vastly expanded.   This would release Ireland from the current debt straightjacket and bridge the gap between our debt re-structuring and the new European Stability Fund.

Irish economic strategy

Few are convinced that the December summit has provided the solution to Europe’s financial crisis. If all countries introduce austerity programmes they’ll likely drag each other down.

Ireland’s own plan for recovery consists of driving down domestic demand while boosting exports.  This will only work if the European and global economy picks up.  Economic forecasters are predicting a mini-recession acrossEuropein the first quarter of 2012.

 The three key questions which Ireland must ask itself following the December summit ‘financial firewall’ and ‘fiscal compact’ initiative are:

  •  Will it work? – will it resolve the Debt crisis, the Banking crisis and lead to growth inIreland,Greece,ItalyandPortugaland beyond?
  • Will it protect European solidarity?
  • Does it uphold the key principles of subsidiarity?

Ireland now reduced to austerity and Local Authority status

Full fiscal union, as defined by France and Germany, marks the end of any safeguards through veto or through non-approval that Irelandhad trusted and relied upon as the EU evolved over the years.

In EU terms, full fiscal union finally consigns Ireland’s national parliament and political leaders to a Local Authority status of governance with responsibility for policing, education, health, housing and transport.

While the bailout troika of the EU/ECB/IMF oversees Government policy under its Memo of Understanding remit, surely a deeper investigation of how Ireland has mis-managed its affairs would undercover a culture of cronyism and corruption; localism; patronage; a sense of entitlement and an inability to learn from mistakes or the mistakes of others.

Budget scrutiny – is it a price worth paying?

  • There are those who believe that allowing Irish national budgets open to  EU/German budgetary scrutiny has its merits.  It might ensure that Governments and overzealous political leaders and their finance ministers could no longer lure an electorate with the promise of budgetary ‘goodie’ bags.
  • Will the new fiscal rules bring pressure to bear on the already unsustainable public sector pay bill. For example, public sector pay increments, which are based on time in service rather than performance, will cost €300 million alone next year.
  • However, the EU, and specifically Germany, insisted that Ireland pay senior bondholders as part of the EU/ECB/IMF bail out deal – an appalling decision and flew against all the rules of financial speculation and the capitalist system.
  • Has the Irish Government lost the moral authority to implement strict budgetary measures on its citizens following its failure:

–         to reform the political system;

–          to reform the political expenses system;

–         to reform the senior civil servants and senior politicians pay-offs and pensions;

–         to adhere to its own salary caps for political advisers

–         to present and handle Budget cuts with fairness, clarity, creativity and sensitivity?

Is a ‘Managed Withdrawal’ feasible and what would it involve?

  • Withdrawal would need support from the ECB for liquidity reasons
  • It would involve arrangements with EU authorities for a re-calibration of the debt
  • It would mean a return to a national currency as per Norway, Sweden, Denmark and the UK but with power to devalue.

The negative consequences would inevitably lead to a rise in unemployment and inflation and currency-wise, who would we track? Devaluation would provide a boost for exports, and possibly tourism.

There are serious concerns that leaving an international currency in the middle of the worst recession in the country’s history when the economic is so weak, would be disastrous and could amount to a giant leap in the dark.

However, bereft of any effective leadership on the financial crisis at EU level over the last three years,  the EU’s economic orthodoxy and the burden of debt is sinking Ireland and others in a ‘one size fits all’ emasculating and rigid approach.



1 Response to “Merkozy, Fiscal Compact and possible withdrawal from the Euro”

  1. 1 Jerry Hart December 19, 2011 at 6:48 pm

    I think the essence of the problem is embedded in the last couple of lines of this very thoughtful piece you have produced. As someone who lost the ability to buy a decent off-the-peg suit long ago, I can tell you that ‘one size fits all’ can mean that ‘no size fits anyone’.

    In a community as economically, culturally and geographically diverse as the EU, this has always been a major challenge.

    Moreover, the issue of (non-) compliance with regulatory requirements is another biggie. We Brits complain about Brussels bureaucracy – but that’s because we (generally) have a culture of compliance, whereas many EU States do not. This is just as true in high finance as it is on any construction site.

    One set of rules but 27 sets of interpretation is not ‘one size’, no matter how much it pretends to be.

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