Why treaty changes won’t help
November 24, 2011 6 Comments
Merkonti (Merkel, Sarkozy and Monti) announced at the press conference following their mini-summit today that they are in favour of small treaty changes to take steps towards fiscal integration. We don’t know exactly what these treaty changes will consist of, though Merkel and Sarkozy have promised to propose some in advance of the December 9th EU summit. It seems likely the treaty changes will include automatic sanctions for fiscal rule-breaking. Will this help stem the crisis? Most certainly not.
Automatic sanctions for fiscal rule-breaking could be the first in a series of incremental steps towards fiscal union. Merkel has made it clear that her preference for achieving fiscal union is to first achieve political union, then introduce pooled assets and as a final step potentially introduce Eurobonds. This is all a nice theory, but it comes about 20 years too late. Eurozone leaders must adopt a policy stance immediately to stem contagion from the crisis. This is no longer a fiscal crisis that can be solved by simply forcing each country to get its fiscal house in order. By now it is a financial, political and above all else growth crisis as well. Automatic sanctions do absolutely nothing to address these other issues.
Even if automatic sanctions could help, I doubt they’d be agreed by all 27 EU member states. The UK has recently spoken out vehemently against the financial transactions tax that Germany has championed, so the UK may not sign up to further fiscal integration. Furthermore, Irish finance minister Michael Noonan asked the EU for debt forgiveness once again earlier this week. The ECB will undoubtedly deny him this request for the umpteenth time, only for EZ leaders to turn around and ask the Irish people to vote in favour of treaty changes in a referendum. I doubt EU treaty changes would pass in Ireland.
Even if all 27 EU countries agreed to treaty changes, the process of holding referendums and ratifying the changes in various parliaments would take several months, if not years. With bond yields rising in the periphery and core alike, action must be taken immediately. The chances of agreeing treaty changes to achieve fiscal integration are low, but the chances of doing so in the time frame necessary are close to zero.
For more in-depth analysis on the proposed treaty changes and what to expect looking ahead to the November 29-30th Eurogroup/Ecofin meeting and the December 9th summit, read the latest Europe Weekly produced by the Western Europe team at RGE.