Guest Post: The Toothless 'Euro' Tiger And The Issue Of Fiscal Compliance
Submitted by Pater Tenebrarum of Acting-Man blog,
A topic we have frequently discussed in this pages has now made it into the mainstream press: namely the question in what way the new 'fiscal compact' is actually different from the Maastricht treaty when it comes to enforcing compliance. It turns out, there really isn't any difference, and it is for the very same reasons that stood in the way of countries respecting the Maastrich treaty's limits.
Der Spiegel reports:
„The EU plans to enforce its rules by imposing tough penalties in the future. But experience suggests it won't be able to gets its way against major EU countries. Even the much-vaunted fiscal pact pushed through by Chancellor Angela Merkel to underpin the euro is at risk of being watered down. When it comes to publicly urging greater integration, most European leaders aren't to be outdone.
"We need more Europe, not less," says German Chancellor Angela Merkel. "We don't need less Europe, but rather more intelligent integration," contends Luxembourg Prime Minister Jean-Claude Juncker. And French President François Hollande says: "We realize that the euro zone must have a common economic policy."
Herman Van Rompuy appears to take these affirmations literally. At next week's European Union summit, the EU Council President intends to present a bold concept to fundamentally restructure the monetary union. According to this proposal, the European Commission, the EU's executive, would gain the right not only to recommend amendments to national draft budgets, but also to enforce them. If a government resists, the Brussels-based institution would have the power to impose fines.
In many European capitals, though, Van Rompuy's reform plans are controversial. Indeed, many politicians have been put off by the numerous rules and regulations that Brussels has already used to intervene in the economic policies of crisis-stricken countries. Until now, the threat of EU sanctions has mainly been confined to smaller member states.
For instance, early this year the Commission threatened to suspend subsidies for Hungary. Shortly thereafter, the nationalist Hungarian prime minister, Viktor Orbán, gave in to Brussels' demands. After all, 97 percent of all public investment in his country is financed to a significant degree by the EU.
By contrast, large countries such as Spain, Italy and France have so far had little to fear. Olli Rehn, the European commissioner for economic and monetary affairs in Brussels, knows better than to antagonize certain countries by imposing sanctions.“
And that is precisely the reason why the Maastricht treaty failed so spectacularly as well. The fforst euro area member countries that failed to adhere to the treaty's limits were Germany and France when the early 2000d's contraction diminished tax revenues and invited a round of Keynesian 'stimulus' spending. In theory, they would have been eligible for penalties under the treaty. In practice, no penalties were imposed. They thereby lost the right to complain about treaty violations by others, and accordingly remained silent when they began to appear. This only changed when the sovereign debt problem morphed into an outright crisis. However, even now, neither Germany nor France have any moral standing on the issue: their debt-to-GDP ratios are approximately 50% above the limit. They are of course not among the nations requiring bailouts, as their debt has received the 'safe haven' treatment by desperate market participants. The fact remains though that they are so far away from the limits imposed by Maastricht and the new 'fiscal compact' that it is downright comical that they preach austerity for everyone else.
The new 'compact' won't materially alter this situation, no matter what Herman von Rumpoy thinks.
As the 'Spiegel' article concludes:
„The latest toy for euro fans is the fiscal pact, which still has not been ratified by all member states. In the future, this would only allow structural deficits of 0.5 percent of GDP. This regulation, which was primarily pushed through by the German chancellor, sounds hard and binding. But European politicians are already working to water it down.
Speaking before the National Assembly in Paris last week, French Prime Minister Jean-Marc Ayrault lobbied for support of the fiscal pact by saying that it would not limit the sovereignty of the French parliament. He then turned the pact's intention on its head: "The treaty imposes no constraints on public spending," he said.
Well, not that we have cleared this up... if there are 'no constraints on public spending', then why negotiate another 'fiscal pact' at all? As Philip Bagus has shown, the euro area is a good example for the 'tragedy of the commons'. Evidently that is not going to change until the monetary union simply falls apart.