The Fiscal Compact puts Europe on the Wrong Track
Today the Irish people will vote on the Treaty “on the Stability, Coordination and Governance in the EMU”, also known as the “fiscal compact”. This referendum is of paramount importance for the whole European Union. I recently wrote an editorial on the French daily Le Monde, together with Imola Streho, explaining why we believe it to be poorly designed and economically ill conceived. Here is an English version.
The substance of the Treaty is not original, as the idea of a balanced structural budget was already embedded into the Stability and Growth Pact (SGP). The fiscal compact simply adds a requirement of yearly debt reduction until the 60% reference level and, most notably, it calls for the new norms to be embedded in national legislation at constitutional (or equivalent) level.
Before proceeding with the ratification, the European people and lawmakers should ask why the SGP has been loosely enforced so far. There are at least two reasons. First, it prevented governments from running discretionary policies; or, in case of “exceptional circumstances” allowing, like in 2009, countercyclical policies, it is forcing them to hastily implement fiscal contraction; the current wave of fiscal consolidation across Europe plunged the zone into a double-dip recession, proving how perilous such a strategy can be.
Second, a balanced structural budget over the cycle implies that the ratio between a constant debt and a growing GDP would decrease towards zero. It is hard to imagine a private entrepreneur pursuing the objective of zero debt, and yet we are about to enshrine this constraint in the constitution of EU Member States precisely this requirement! At the very least, public investment should be excluded from the computation of deficit (the golden rule), in order to finance long-term expenditure through debt.
Equally puzzling are the legal problems the fiscal compact poses. The signature of the fiscal compact, a new international agreement by the 25 contracting states is not questionable by itself. However, the choice of the legal instrument may pose problems from the perspective of its relation with the EU treaties (Treaty on the European Union and Treaty on the Functioning of the European Union). Indeed the fiscal compact complements the already existing legal corpus of EU treaties and secondary law; so why a separate source on these issues? And if the political will was to have the balanced budget rule encapsulated in the highest norm, why not incorporate it into the existing EU treaties? All the more so, if the new legal instrument refers to the EU institutions (Commission, Court of Justice) and relies for certain parts on them… This is certainly unprecedented and does not help to advance the elementary considerations of clarity in an already complex European legal environment. Also, the proliferation of such separate norms outside the scope of the EU treaties comes with institutional and legal costs. It indeed weakens the “European method” in the area of Economic and Monetary Union to the benefit of the intergovernmental one, often dictated by national political priorities. Like the fiscal compact marking the victory of the “Berlin View” of fiscal policy: strict austerity, compression of domestic demand, and export-led growth. The ratification of the fiscal compact is still uncertain but ultimately we fear that it will lead to “less Europe”, rather than more of it in this case.
Finally, it is worth noticing that the balanced budget rule has been disruptive for American states, forced to cut spending and lay off public employees, thus exacerbating the crisis. While it is true that most American states have stricter rules than the fiscal compact (notably, the budget must be balanced every year), the federal government retains the possibility to conduct discretionary policy, that proved necessary to dampen the procyclical expenditure cuts at the state level. But, the European Union has no supranational entity of that sort.
The Irish referendum may well become the last rejection by the European people of austerity policies, after the dramatic case of Greece, but also France, and even important local elections in Germany, where European woes were central in the debate. The fiscal compact creates legal complications, is harmful for the EU economy and, as the United States show, it would only make sense within a truly federal system. Are our leaders ready for the United States of Europe?