Thursday 15 December 2011

The Left and the New Fiscal Compact

The new fiscal compact is all about discipline. Eurozone states will need to keep their debt and deficits under control and this will be supervised by the Commission. The compact has come in for a lot of criticism already for two reasons - it's too austerity focused (making keynesianism policies difficult if not impossible), and it doesn't address the immediate crisis. This has lead to calls for the left to take the fight to the EU and queries over the democratic desirability of the deal. But what can the left do?

The urgency of fiscal union and the necessity of discipline

To some extent discipline is necessary. If there's going to be a currency union with fiscal solidarity (Eurobonds, the ECB playing the role of the lender of last resort, etc.), then Member states need to be relatively sure that they're not signing an open-ended agreement to support the spending plans of other Eurozone countries without any say or safeguards from the moral hazards that might arise.

The problem is that this new fiscal compact offers no real solidarity: it's essentially a Stability and Growth Pact Plus. The economic hopes behind the deal were pinned on the reaction of the ECB, and whether it would act more as a lender of last resort (it would have been better if this was part of the deal, rather than a hoped-for side effect). The deal expresses an intention for future fiscal solidarity, but it doesn't define what the possibilities are or set a time frame for them. That said, there's 3 months to negotiate the actual treaty so the crisis and negotiations could take twists and turns that force the Eurozone to look more closely at fiscal solidarity. Still, for all the urgency for greater solidarity to make the Eurozone more politically and economically credible, some level of discipline is necessary to underline the necessary trust for the system to work. Any alternative articulated by the left needs to take account of this.

The options for fiscal union seem to be: do nothing (which doesn't seem an option, but is the default if the deal falls apart), fiscal discipline, or fiscal discipline plus some form of solidarity (from a changed ECB role to Eurobonds and a common growth strategy). The argument runs that the bail-out countries need investment and growth plans and that the new discipline entrenches the failed austerity. But where would the money come from to invest in the bail-out countries and in the countries on the edge of bailed-out-dom? The markets won't accept the level of borrowing necessary, so there would need to be more solidarity and support across the Eurozone to encourage growth. (Not to mention rhe need for democratic controls through national and the European parliaments). There needs to be a coordinated response, and therefore any alternative has to be backed up by a political coalition that could win support to advance its solution across the Eurozone. Success in simply opposing the new fiscal compact would merely keep us in the same position we're in now: there needs to be a viable alternative.

Does the Left measure up to this?

Simply put: no, not really. The Party of European Socialists (the centre-left bloc of parties) has criticised the lack of Eurobonds and changes for the ECB:

"PES interim-President, Sergei Stanishev, argued that the important elements missing from the summit decisions are granting the European bailout fund a banking licence, introducing eurobonds, introducing a financial transactions tax, and a "real plan" for investment and growth.


The European Central Bank (ECB) has also been given the possibility to provide ‘technical support’ for the European Financial Stability Fund (EFSF) and buy bonds only on secondary markets. The European Stability Mechanism is set to start in July 2012.

In summary, this draft plan is a clear and historical signal of what a Conservative majority in Europe means for ordinary people. In the past, the European Union succeeded because any advance on the single market or on monetary union was always balanced by improvements in social Europe. This is not the case this time. The absence of a growth strategy and solidarity is striking.

There is a huge risk that the absence of proposals on Eurobonds, on an EFSF banking license, and on a coherent Investment strategy, could lead to an absence of public support."

Despite making the right noises, there doesn't seem to be a full vision for what needs to be done and what shape it will take. Though the Europarties tend to be quite coherent in the European Parliament, they have a dismal track record at forming the basis of promoting new political arguments or shaping a political coalition around established arguments.

Within the Eurozone countries discussion will turn to the benefits of the deal versus the loss of sovereignty. If the choice isn't to be between the compact and what we have now, the opposition will have to organise around a credible alternative. But then there's never been a political demand within the national parties for a stronger common platform - and even with the best will in the world it would be hard to construct one ad hoc at the moment. But perhaps the PES could act as a link between centre-left parties to transmit ideas and to help some sort of consensus emerge slowly as the crisis progresses (and it's got a long way to go yet). It will be a miracle if the left can build a common theme and European alliances they can point to form a basis to their opposition, but it's necessary to form a constructive opposition.

Anyone willing to place their bets?


  1. A fundamental problem, I believe, for the Left as well as the Right is that growth through added public borrowing at reasonable rates is no longer possible. The previous round of failing banks, property bubbles and economic recession saw to that.

    That leaves qualitative (structural) growth reforms, usually even less popular on the Left than on the Right. (In some cases, such as Greece, paying and collecting taxes plus good governance are sorely needed.)

    People somehow seem to be taken by the short term perspective. Even if much quicker and comprehensive action is needed, a credible roadmap with all the elements in place could do much to halt the eurozone from going over the edge.

    This is why the fundamental reform I have sketched is needed more and sooner than ever:

  2. The Left in the European Parliament is clearly not up to the task. It could have blocked the Fiscal Compact or at least it could have set up an inquiry or a special committee in order to control Merkozy. But Mr. Schulz did not dare - he was satisfied with the mere promise that he would participate in the setting up of the Fiscal Union. But the liberals and the Greens did not do much more on this here: (in German ) So I am afraid Merkozy can go it alone..

  3. @ Grahnlaw

    I agree that both short and long term approaches are needed. I doubt founding the EU as a sovereign state (if I understand what you've written correctly) is politically possible, and I don't think it's politically desirable until a more common political culture develops with more relevant Europarties. I do think that progress needs to be made on fiscal union (and I broadly support the PES's vision, even if they have skirted around the issue of discipline and other details), and that Eurozone MEPs should have a political role in the new structures. I think this can bring political and economic confidence back to the Euro and reduce borrowing costs - though I admit that even the costs aren't necessarily the problem if, like Germany, low rates don't guarantee sales of bonds...

    @ Eric

    I'd need to check how much say the EP would have if the treaty is outside the EU treaties (and it needs to be remembered that the treaty hasn't been drafted yet, and that the EP is dominated by the economic right). How would an inquiry or special committee work in practice?

    I agree that the performance of the S&D (or outisde the European Parliament, the PES) hasn't been anywhere near good enough on the crisis. More worryingly, none of the Europarties have played a real role in the crisis - if often seems like the EPP is simply nodding along with whatever the Council does. So there's little competition outside the EP or demand to force the Europarties to play a more important political role... Like I said at the PES's Re:New conference, it looks like the PES is hoping it can replace this Merkozy with its own version over the next 2 years.

    I'd like to say that we should try demanding that these Europarties come up with real alternatives (and force them to start to overcome their own divided structures), but it would take a lot of people within political parties a lot of time to achieve the necessary changes. But I bring it up because, well, what's the point of party politics if you can't give these things a go (as a party or as citizens/party members)?