Tuesday 31 January 2012

The Fiscal Stability Treaty

We've got our new Fiscal Stability Treaty (which you can read here). Frankly, it's hard to know how to approach it, given the fact that I've posted about it when it came out and on the problem it poses for the European left. Not much has changed in terms of the general aims and principles of the compact. Also there's a great summary of the text over at the European Union Law Blog:

"The provisions are intentionally vague in order to avoid any conflict with the enhanced powers of the EU post-Lisbon. The only meaningful instrument is the sui generis infringement procedure in case a participating Member State has failed to apply the automated deficit correction mechanism. However, this procedure is substantially weakened by the fact that Member States, and not the European Commission, must petition the ECJ. This will happen only in extraordinary circumstances and with great unease.

In addition the provisions on economic coordination are totally bland. I fail to understand how these texts may enhance economic policy coordination – they are restating existing opportunities in EU law."

I agree. We already have the Stability and Growth Pact part of the EU treaties, and the "6-pack" of legislation passed at the end of 2011 essentially tightened up the Economic and Monetary Union - which is already having an effect on national politics and budgetary policy in Belgium. Apart from enforcement mechanisms, the treaty offers little that is new: no Eurobonds, no expanded role for the ECB, nothing on investment - coordinated or otherwise - or any firm kind of economic strategy that would back up the vague mentions of growth as a goal. Good thing the treaty has the cumbersome title of "Treaty on Stability, Coordination and Governance in the Economic and Monetary Union" - if they'd called it a treaty on fiscal union they might as well have tied their credibility up in a bag and drowned it in a well.

This treaty does nothing to address the crisis, and it's only preventative in the sense that it aims to ensure that Member States don't continuously rack up debt. While this might prevent a future Greece/Italy crisis, it would be totally useless in an Irish-style crisis where budgets were balanced or in surplus before the crash and collapse in tax receipts. "Stability" is the key word. The treaty is designed to maintain the stability of a currency union which is made up of members who have joined having met the criteria and stuck to the criteria once inside the club. It does nothing to provide a mechanism for resolving crises, but rather the deficit correction ethos is directed towards isolating any crisis and protecting the stability of the currency union as a whole. It won't work, and it's hard to see how it could be politically attractive without being balanced with more fiscal solidarity - a transfer union. That's not to say that some budget discipline isn't necessary to promote stability in the good times and to build trust between Member States, but without a true fiscal union this trust isn't reciprocated and so the treaty is of questionable political and economic value.

Institutional politics and the UK

It's clear from the treaty that the Commission and ECJ will be involved under the treaty. The European Parliament and national parliaments will be involved via some sort of meeting with representatives of their relevant committees - how this works in practice is simply not mentioned - and the European Parliament president will be invited to talk at some EuroSummits. The President of the EuroSummits (yes, a president will be elected for the same 2.5 years as the European Council presidency currently held by Van Rompuy) will organise the summits (held 2x a year and after European Council summits) and report back to the European Parliament.

Clearly the European Parliament only has a slight consultative role, and it's demands for policies for economic growth have been ignored. Given that it's new president has made fighting for the EP's position under these issues a key part of his presidency, the Parliament might reject the treaty and try to weaken political support for it.

The treaty also leaves Cameron in an odd position. I've written about the strangeness of the British demands regarding the single market before, but we should be clear about one point: nothing in this treaty (or in the possible treaty within the EU) affects the single market legally. If the treaty had have been part of the EU treaty system is wouldn't have changed the single market legally. The British concern for national influence and the financial market is essentially about political and institutional influence.

The UK won't block the use of EU institutions - Cameron has confirmed this, though he points out that he will be on the look out to ensure that there is no abuse that would damage the British national interest. I have no idea what practical policy or action this would refer to as all single market legislation has to be voted on within the EU structures. One possibility would be that the UK would try to ensure that the Eurozone countries didn't discuss single market issues in their meetings, but it would be a bit hard to enforce in practice as ministers and heads of state and government could discuss these issues at the meetings without having them on the official agenda. However, the UK is helped by the fact that EuroSummits will take place after European Council summits, so this limits their potential as a platform for countries to agree and discuss issues in advance without the UK. On the other hand, as it isn't a signatory to the treaty, the UK won't have a right to be involved in the EuroSummits unlike other non-Euro participating countries.

Overall the UK hasn't gained anything by using it's veto,* and hasn't lost out legally from using it either. It's in good will, influence and future participation in negotiations and debates that it has lost. How big of a loss depends on the future of the Fiscal Stability Treaty...

*And using it prematurely at that, given that denying use of the EU treaty system would be a bigger threat later on in negotiations - it's hard not to get the impression that Cameron doesn't know the first thing about the practical aspects of negotiation...


  1. Pointless treaty is pointless.

    It will neither address future fiscal difficulties NOR would it have prevented the existing crisis, as you pointed out (even in Italy, where the debt had been steadily shrinking before the crisis). And it obviously does absolutely nothing to address the short-term problem of recession-austerity-rising bond yields death spiral.

    Its only saving grace is as an eventual political move by Merkel to make the necessary action (eurobonds/ECB) palatable to her constituencies. German officials have repeatedly contradicted such interpretations in recent weeks.

    So, unemployment has just risen to 10.4%, and it is likely to continue to go up notwithstanding the "jobs & growth summit". The measures taken in this regard, with its nice 7-page communiqué on jobs, are basically a placebo as EU officials privately tell you (http://www.euractiv.com/euro-finance/greece-elephant-room-summit-talks-news-510449). "Like a paracetamol for a broken arm."

    So, yeah, pessimism...

  2. I don't think anyone outside the Brussels Bubble takes the growth talk seriously either.

    The question is whether it's necessary to accept the treaty for a future move on Eurobonds and ECB changes or would blocking it make those things less likely? If it's accepted would it poison European politics so that even the weaker countries won't go for another treaty change?

    It would have been better to go for a grand bargain on fiscal union than to approach the problem piecemeal...