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.
Megan Greene is the Director of European Economics at Roubini Global Economics, specialising in the eurozone crisis. She provides political and macroeconomic analysis and forecasting for Greece, Ireland, Portugal, Spain, Italy and Germany. The opinions expressed here are her own and do not reflect those of any employers. Ms Greene offers an independent voice without a political or investment agenda.
Meg,
Agreed that last week’s Commission proposals for a stronger fiscal surveillance are not crisis-fighting frameworks, but they are nevertheless necessary for the medium-long term survival of the euro area (which, incidentally. is the official name of the arrengement). Short and medium term actions have, after all, to be pursued in parallel.
Lucio.
PS: I see that you still use the PIGS acronym in your website banner…
If the US decides to print money and give it to the IMF who in turno gives it to Italy, wouldn’t this be the hard cash solution you said necessary?
That would qualify, but there is no way the US Congress will agree to that. It’s a non-starter.
What about the ECB issuing its own bonds in order to fund European states? (Varoufakis)
Also, ECB and EIB issuing jointly in order to fund real investment projects? (Varoufakis)
Thus, no debt monetization, (at the end, even monetization need not be that bad if funds are directed towards productivity growth), no guarantees from member states (the two things that Germany opposes), and, finally, some consideration for growth. These two will buy us time, and contribute somewhat towards real growth.
But most importantly, as the above measures buy us time, what about those structural reforms, but also harmonised across the EU of 27 (taxation, labour markets, corporate law, financial institutions central, not anymore national, supervision, pensions, insurance) to finally address the major problem, that of competitiveness and real investment based growth, without which buying time has no meaning in itself. If the issue of competitiveness and investment based growth are not addressed in detail the markets reaction, in my humble opinion, will be such as to push for the break-up of the Eurozone.
P.S. Treaty changes addressing fiscal discipline (what about private debt then, which is twice as big as the public one) are missing the point, and, moreover, will not be accepted by a number of sovereigns (allowing them less degrees of freedom for managing their economies). As for having the IMF in the middle as a transmission mechanism of transfer payments and recycling surpluses globally raises serious doubts regarding efficiency and sovereignty. You are effectively asking low per capita income nations to help rich Europe. Even worse, IMF as a transfer mechanism of money printed by the Central Banks (in exchange of loss of sovereignty) can be rather humiliating and to my mind does not deserve serious consideration. These transfers have nothing to do with the post war American aid to Europe and Japan.
I would very much appreciate your comments.
***The views expressed are mine, those of a free citizen and thinker deeply caring for the European project.
The ECB caused the problem, continued the problem by demanding its pound of flesh from whom they saw as non-compliant national governments to their plan. The ECB is the sole responsible body for the perceived EURO crisis – which to them is not a crisis but an opportunity to gather the EU countries into one single fiscal body.
Me thinks this is has been the plan all along. The 9th of December should confirm the plan is on target for total integration by 2015 as predicted (by DeLores in 1999).
I wouldn’t be too sure about a treaty change or new treaty referendum failing in Ireland. Ireland is in the middle of its fourth austerity budget with four more to go. The brief glimmer of hope from the resumption of growth is being eclipsed by worry about our export markets. People are nervous – many fearful.
Previous Irish rejections of the Nice and Lisbon treaties happened in the context of a much more confident and positive national mood – a cockiness even. People were doing well and many were willing to stand up to perceived European pressure and risk European wrath. Next time, adament that the disaster that has befallen Ireland must NEVER be allowed to happen again, they may be well be more compliant.
Many of us have learned that we can’t trust the competence our own politicians. We’ll see what comes out of this week’s negotiations, but having our politicians under legally mandated fiscal restraints might be no bad thing.