An incomplete treaty

Twenty-five countries (the whole of the European Union except for the United Kingdom and the Czech Republic) signed on Friday in Brussels the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. This is an important step forward although it still falls short of a true fiscal union. Instead, it consecrates the principle of the contention of budget deficits as demanded by Germany.

While 24 nations have taken significant strides toward the thesis of Angela Merkel, the German leader has given nothing in return. And yet this ultra-strict austerity approach which has inspired the new treaty will not offer an economic solution, even for Germany.

Merkel has described the fiscal compact as a “first step,” despite the fact that the immediate future of the agreement is far from problem-free. To start with, it is regrettable that it empowers inter-governmental Europe over and above the Union as a whole, due to the refusal of Britain to participate. However, it does maintain a central role for the Union’s institutions, such as the Commission and European Court, although it is yet to be seen if London will accept the legality of this set-up.

One novelty of this treaty is that it will take effect once 12 euro-zone nations have ratified it; in other words, unanimity is not required. As such, Ireland’s plan to hold a referendum may sow seeds of doubt, but does not carry the threat of veto on the whole project. Meanwhile, in France, the presidential candidate François Hollande has pledged to renegotiate the pact in order to incorporate stimulus policies. When the also Socialist Lionel Jospin won the 1997 legislative elections, he forced a revision of the Stability Pact, similarly with the aim of boosting the growth aspect. But the changes were insubstantial. Ultimately, whether Hollande wins or loses, the need for the EU and Eurogroup (where resistance to excessive austerity is growing) to adopt growth-fostering policies is an imperative one.

As far as the Spanish government is concerned, the new document does not constitute a problem in any formal sense as the constitutional reform agreed on last summer enshrines the same principles in national law. But the spirit of this pact will not be able to resist three consecutive recessionary quarters in Italy and Spain, whose governments would thus find themselves forced to obviate these rigid rules — beyond even what they are doing at present — in order to avoid falling into a full-blown depression.

Exorbitant privilege

A fiscal union cannot be based solely on shared discipline. It also needs a sizeable budget and for the European Central Bank to become the last-resort lender in the mold of the US Federal Reserve. The two European rescue funds constitute an advance in this sense, but Germany refuses to allow them to be merged and broadened so that they can act as a genuine firewall against a potential crisis even greater than that of Greece. Berlin is also opposed to the idea of eurobonds, but the system is not viable upon the basis of the exorbitant privilege — the term which Giscard d’Estaing used in reference to the United States and the dollar — under which Germany finances its debt at the rates it currently enjoys.