The Irish Fiscal Stability Treaty – Why the Fuss?

The Irish AG Sets the Ball Rolling…

When the Irish Attorney General Máire Whelan, decided in late February to throw the decision over the ratification of the European Fiscal Treaty to the Irish  people in a referendum (since scheduled for May 31st), the euro plunged on world markets and has remained somewhat perilous ever since.  It has become increasingly clear that Europe must be dragged kicking and screaming into making the right decisions for its people, with political considerations eclipsing the need for some proper, sound economic logic. PIIGSty has long endorsed the idea of some degree of European control over eurozone fiscal matters because, put simply, that is what is supposed to glue together every monetary union. Why? Because if you want to play the game, you must adhere to the rules. The rules of the euro are very clear – and all euro-users (including Germany and France) are all culprits of massaging the rules (Stability and Growth Pact – SGP) to suit themselves. Now, its back to basics.

The Historical Background

A recommended PIIGSty study on the euro is provided here. In a nutshell, when the euro began circulating in 2002, the European economy was so strong that any idea of caution was viewed as unnecessary negativity. As economists began to query the honest reporting of the macroeconomic situation in Greece by the Greek finance ministry, the party just continued. Like the drunken older uncle at the wedding, the guests politely ignored him. A bit of an embarrassment – sure! – but hes family now and hes not really having an impact on the grand banquet itself.  When the German Bundesbank in 2005 warned that relaxing strict entry rules to the euro (Maastricht Criteria) and fiddling around with the maintenance rules of the wider euro-union (SGP) to suit those countries who happened to breach them (i.e. France and Germany, at that time – among others) – another huge red light was ignored. To use a separate railway analogy, the eurozone train had been gathering speed down a steep slope, and as the terrain leveled off, the driver worked to release the breaks to maintain the high speed the passengers demanded.

And so we come to the current crisis. PIIGSty has a number of articles on how and why we got here. But what about how Europe plans to avoid a repeat experience. The answer, or part of the answer, is the EU’s Fiscal ‘Stability’ Treaty or Fiscal Compact.

The Point of the Treaty?

The merits behind the Treaty, from the EU’s standpoint, are logical and ultimately imperative – as has frequently been discussed here on PIIGSty.com.  FYI here it is http://www.european-council.europa.eu/media/579087/treaty.pdf

Put simply – centralisation of fiscal control of eurozone national budgets is seen as necessary for both economic and political reasons. Economic – because centralised control means insisting on common standards and avoiding some states freeriding on the backs of fiscally responsible countries (i.e. Germany). Political – because it removes (or at least reduces significantly) the temptation for political leaders to throw taxpayers money around to gain political popularity and advantage. Reasoning is straightforward enough. Considering the complete mess the PIIGS have made of their own finances (some excessively more than others, of course), the Franco-German alliance of Sarkozy and Merkel (‘Merkozy’) agreed at Deauville in 2010 that to protect EMU (i.e. the euro) means achieving 2 particular means:

  1. An agreed crisis management strategy in the eurozone replacing the ‘headless chicken’ approach currently in operation thanks to ambiguous ‘bending’ of the Lisbon Treaty
  2. Formal powers to suspend an EU member state in the Council of Ministers in the event of violation of ‘basic principles’ of EMU

One particular offspring of the Merkozy Deauville love-in was the controversial EFSF (see here). So, how to enhance coordinate fiscal eurozone fiscal policy?

Simple. A souped up Stability and Growth Pact (SGP) with teeth – actual formal concrete power, forcing euro-users to return to 3% budget deficits and 60% Debt : GDP ceilings  –  the same end targets of the current austerity programmes across the PIIGS  along with a collective power to penalise those who don’t respect the rules.

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