The fiscal compact and Euro-federalism… March 7, 2012Posted by WorldbyStorm in Economy, European Politics, Irish Politics.
Frank Barry, Professor of International Business and Economic Development at Trinity College Dublin, had an interesting piece in the SBP this weekend on federalism and the EU. He’s clearly in the federalist camp, but that doesn’t negate what he writes. For example he’s sceptical about the fiscal compact:
The new EU fiscal compact, on which we Irish have now been called to vote, does not address the major design flaws in the euro project. It is, at best, a sticking plaster designed to provide the dominant eurozone players with the political cover they require to take the steps necessary to defuse the current crisis.
This is to be valued, though it may itself store up trouble for the future. A European Commission study from the 1990s showed that several of the most severe recessions of the preceding decades would have led to violation of the Stability and Growth Pact deficit limits by some member states, even if they had started from zero deficit positions.
It’s good to see someone call the compact as it is. A political mechanism to carry France, but more particularly, and Germany across their own political hurdles, rather than a inevitable or necessary socio-economic framework that the eurozone can simply not do without.
The cynicism of this is pretty breath-taking when one stops to consider it for any length of time.
And worse still it simply doesn’t address either the current or future problems:
Under the compact, countries in this position would be required to pile austerity on austerity unless the rules are applied sufficiently flexibly. There is no rule, of course, as to how much flexibility might be forthcoming.
But other crises will follow in time, in the absence of more fundamental change. The fiscal compact does nothing to address the failures that led to the Irish and Spanish crises. The eurozone gave these countries much lower interest rates and provided their banking systems with much easier access to external finance with which to fund the resulting housing booms.
And Barry makes a point that needs to be articulated loud and clear. Currently neither the Eurozone, nor the EU proper, has the tools in place to mitigate the negative outcomes of its very structure. He notes that there were warnings that national economies and banking systems were simply unfit for purpose in fending off ‘turbo-charged internationalisation of finance’. But these were not listened to. But logically – given the weakness of dissenting forces – the only game in play is the EU/eurozone.
But in order to shore up the EU and the eurozone the means necessary…
… clearly move[s] us further towards a federal Europe. But now consider the role that the US federal budget plays in cushioning regional recessions in that jurisdiction. Tax payments to Washington fall sharply, and there is some reallocation of federal expenditures towards the region. Some analysts estimate that as much as 40 per cent of a regional downturn is cushioned in this way, which serves as a substitute for currency realignment.
Europe’s Structural Funds are insignificant in comparison. The absence of such mechanisms is particularly damaging for those eurozone regions whose business cycles are out of sync with Germany’s, since the latter largely determines interest-rate policy. Unsurprisingly, this group includes Ireland, Portugal and the Mediterranean economies (as well as Britain).
And therein is illustrated the essential disconnect at the heart of what we are being asked to vote on this year – though isn’t it interesting how the vote itself is now up for question by the Government with some wanting a later poll and others earlier. This fiscal compact addresses none of this. Barry notes that ‘The fiscal compact will not prevent future crises because it does not address the fundamental design flaws of the project, which have little to do with fiscal incontinence’. As he further notes, the EU and eurozone, to survive must become a genuine transfer union. One may agree or disagree with that notion. Genuine federalism underpinned by democratic accountability would not be something I’d have an enormous problem with. But whether that is possible in this new Europe we appear to inhabit is another question.
But then for that to happen would need levels of political courage and will quite distinct from what has been on offer from EU and national leaderships during this crisis.