Saturday, 17 December 2011

The Fiscal Compact for the Eurozone - Initial Assessment

So the draft Paper is out…referred to as the Fiscal Compact by the ECB head Mr Draghi…but with a more prosaic title: “International Agreement on a reinforced Economic Union”.

The document has a clear “made in Berlin” feel to it both in terms of the style and substance – anyone familiar with the style of EU regulations will spot this. The Teutonic nature of what is clearly a framework will make or break the underlying intent. A lot of the implementation arrangements have to be spelt out…and which in the muddy waters of EU-politics involving 27 States and 17 Euro-members, means a lot of uncertain weeks and Summits ahead.

What will the Compact do which is different?

The aim clearly is to deepen fiscal co-ordination from the current country-specific fiscal management in the Eurozone to something that is clearly more akin to a Fiscal Union. The nirvana would then be a single Euro-wide monetary policy coupled with a sort-of single Fiscal Policy. Bereft of a single EU fiscal policy, the second-best option would be to create binding rules with punitive measures for the miscreant.
But isn’t this the same as before? We already had the Maastricht criteria on nominal criteria for fiscal deficits, public debt and variance in terms of inflation and bond yields and the so-called Stability Pact. Criteria which France and Germany broke when it suited them…

The Fiscal Compact paper re-iterates the same criteria in essence – in particular the 3% deficit limit and government debt to a max of 60% of GDP. It is however a bit more geeky and specific on the Budget Discipline under Article 3 with aims to lock-in governments to structural deficits  by country-specific “reference values” and cyclical adjustment....all of which is as clear as mud…For the un-initiated structural and cyclical aspects are rather like pulling a piece of stretchy string and asking how long is it…
It does however mean scrutiny of national budgets by both the EC and the Council – and article 6 is two sentence-long, clear and to the point. With greater implied involvement of the European Parliament’s budgetary committee and the enforcement through the European Curt of Justice, if and when implemented this will mean a genuine shift in relative competences within the national parliaments to a mix of inter-governmental and EU institutional structures.

And that will  be key point. Whether any EU country can really accept such a potential implied or actual loss of national sovereignty is highly doubtful? Particularly at a time of austerity that may well deepen in 2012-13 and lead to louder calls for growth-enhancing (and deficit expanding) policies and further possible changes in political leadership in pending elections.

Its not a surprise that David Cameron balked at the implications and did a runner…

The EC president Barroso’s remark that this a EU 27 minus rather than an Euro 17 plus agreement is somewhat disingenuous.  The Cameron veto in effect means we now have a formalised two-speed process with the core Eurozoners and the rest – it is de facto the Euro 17 minus.

The draft agreement reinforces the latter point – the agreement becomes binding on the Eurozoners when 9 of them have ratified it. 9…not 17.

Why 9? Hmm lets see, take out the PIGS, the now-toothless tiger Ireland and maybe…say Belgium and you’re left with the..Holy Roman Empire…sorry I mean the D-Mark core plus a couple of newbies like the Estonians and Slovaks.

The document has the French flavouring of a new institutional structure with monthly Eurosummits and a President of the Euro Summit.

Bottom line:
·         this draft is clearly another step into a very long drawn out process even if there is sufficient critical mass of political will across the Eurozoners.
·         this is not a ‘magic bullet’ policy change that will suddenly reduce country risk for the Euro-zoners or indeed for the Euro. Expect more uncertainty and more volatility once the implications are through.
·         Not clear if the ECB sees this Fiscal Compact process as sufficient grounds for a more expansionary monetary stance – if it does under its new Chief then there’ll be an upside.
·         Ironically the current situation could strengthen the UK’s position. Chancellor Merkel has spoken to the British Prime Minister in recent days as has the European Council president Herrman von Rompuy and it is clear that the UK will have an observer status hereon.

1 comment:

  1. Your thoughts are similar to my own about the redundancy to the existing Maastricht criteria -- as you say the Germans and French broke them when it suited them and the Greeks lied about them when they joined. And the rest probably knew they were lying at the time. Also that the Compact precludes a Keynesian or Stiglitzian response to a financial or economic crisis. But not sure that any of this has to do with Cameron doing a runner.