Friday 9 December 2011

The new fiscal compact

Yesterday's neotiations have produced an agreement on a new "fiscal compact" (i.e. they hope the ECB will start playing the role of a normal central bank as much as it can now, even though it's too politically difficult for Germany to agree to it yet). You can find the agreement here (PDF).

Some of the main points are:

"General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.

• Such a rule will also be introduced in Member States' national legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation. It will be defined by each Member State on the basis of principles proposed by the Commission. We recognise the jurisdiction of the Court of Justice to verify the transposition of this rule at national level. [The ECJ will therefore only rule on whether thi rule has been correctly transposed into national law and will not rule on the imposition of sanctions].

• Member States shall converge towards their specific reference level, according to a calendar proposed by the Commission.

• Member States in Excessive Deficit Procedure shall submit to the Commission and the Council for endorsement, an economic partnership programme detailing the necessary structural reforms to ensure an effectively durable correction of excessive deficits. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council.

• A mechanism will be put in place for the ex ante reporting by Member States of their
national debt issuance plans."

There is also a promise to boost the IMF by €200 billion and the European Stability Mechanism (which is to take over from the EFSF in March as the crisis mechanism - though the EFSF will continue working on the current bail-outs until 2013) will take decision during times of crisis by a super qualified majority of 85% if Finland's parliament agrees.

It's easy to criticise the deal as not going anywhere to solving the current crisis - after all, the short term goal of the plan was to provide the ECB with the political cover to do what Germany lacked the political will to change legally in the Bank's charter. Since the ECB's president practically crushed these hopes yesterday, it's hard to see the ECB going a long way to meet this open secret demand. However, the level of integration proposed by the agreement is striking. The powers of budgetry oversight by the Commission and the ability to send in inspectors to non-bail-out countries are particularly remarkable.

While common budget discipline is necessary, there is only the promise to look at tools like Eurobonds in the future. This raises a big issue: if we accept that this agreement is a stepping stone on the way to Eurobonds (introduced in stages to reassure Germany), then it's still a difficult position for the other Euro states to take it on trust. Without the ability to voe on economic policy (opposed to simply vetoing sanctions), and without any promise of some form of transfer union or the possibility of Eurozone investment in deficit-reducing economies, the deal will be difficult to pass in places like Ireland. It will be justifiably argued that this deal sets an inflexible economic policy in stone, and it will be hard to convince people to accept it he understanding that Germany will eventually accede to Eurobonds and a transfer union if its confidence is built up by acceptance of the deal.

How do you sell only half a fiscal union that doesn't seem to deal with the short term crisis which demanded it in the first place?

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