Friday 16 December 2011

The Troubles of the New Fiscal Compact

Yesterday I wrote about the left and the new fiscal compact, and I've noted that the centre-left PES seems to be hoping that the French and German elections will help replace our current Merkozy with a PES version. EUObserver has reported that a majority of the French public (52%) are opposed to the (as yet undrafted) EU deal on fiscal union, largely following left-right lines. The Socialist challenger for the presidency, Francois Hollande:

"...announced that he would renegotiate the document.

"If I am elected president, I will renegotiate the agreement to put what it lacks today," he told RTL.

He said that he would “add what is missing”, mentioning he would push to include intervention from the European Central Bank, the creation of eurobonds and a financial relief fund.

“Finally, there must also be growth,” he added. “Without growth, we will not reach any of our objectives of deficit reduction.”

The Frenchman attacked the core concept of the new agreement, a ‘golden rule’, or balanced budget amendment that should be inscribed into constitutions, in effect preventing future governments from exercising expansionary fiscal policies.

Asked about the golden rule, the candidate said he would not vote for it “under this logic”."

While not all of the troubles fall along clearly drawn left-right battlelines, I think it's fair to say that it would be a mistake to read in a support for the UK negotiating position, as the issues seem to be based around the content of fiscal union rather than either the question of having a fiscal union or voting arrangements for regulating the financial services. Apart from the right-left divide is the concern of the non-Eurozone countries, like Hungary, that it would lead to tax harmonisation even outside the Eurozone. I don't know if this is being discussed (it wasn't mentioned in the deal produced last week), but it seems unlikely that there will be tax harmonisation even for the Eurozone, given so many Eurozone members are against it.

But the main issues will be those Hollande has highlighted: how much solidarity there should be in fiscal union. Merkel is kidding herself (or talking up the value of the deal for her domestic audiance) if she thinks that the deal on the table means political union - the greatest challenge to the deal will come from the push against the maintanence of the German sacred cows of retaining the ECB's current role and the ruling out of Eurobonds. However, it is doubtful that these ambitious goals could be won as well as removing the "golden budget rule" (who knows, maybe any financial relief fund would be sold as a counter-balance to national austerity brought about by the golden rule). The question is whether this pressure (and that of the markets) will force the negotiations to move further and further away from the starting points agreed on this month...

1 comment:

  1. By the looks of the markets the eurozone dynamic duo and the rest are late again. Trouble ahead.