The new EU “fiscal compact” an intimidation for all people

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union entered into force yesterday.

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union entered into force yesterday.

All the major media of the world announced that as from yesterday 1 January 2013 the European Union has a new Treaty on Stability Coordination and Governance, known as “the fiscal compact”, which aims at imposing fiscal discipline in the Eurozone area, plus any other EU country wishing to join.Theoretically, the ultimate goal of the new Treaty is that the euro area avoids in the future a sovereign debt crisis, like the one it faces now. The main enforcing mechanism of fiscal discipline is that national government budgets will be first approved by the Brussels authorities and then introduced in the seventeen Parliaments to be voted.

The Eurozone however was built in the 1990s and functioned after the year 2000 on the almost forgotten today Stability and Growth Pact (SGP), which was a rule-based framework for the coordination of national fiscal policies in the Economic and Monetary Union (EMU), establishing the Eurozone. It was conceived to safeguard sound public finances, an important requirement for EMU to function properly. The SGP contained preventive and a dissuasive arm as the new Treaty does.

Probably with a bit more relaxed limit for the allowed overall fiscal deficits in national budgets set at 3% of the Gross National Product, in contrast with a ceiling of a structural fiscal deficit of 0.5% of the GDP allowed now by the new “fiscal compact”.

What changes with the “compact”?

If one compares though the two upper limits of acceptable public deficits, an overall 3% of GDP in the initial Treaty and a structural 0.5% in the new one, in reality the two do not differ much, in times of recession like now. It depends on what is termed as deficit, because changing the rules you can change and the deficit!. Then what is going on? Do the leaders of the European Union try to fool us all?

Actually the answer to this question is undoubtedly yes, and it’s not difficult to support this argument, if we only recall that it was Angela Merkel’s Germany and Nicola Sarkozy’s France the first two countries to break the rule of 3% fiscal deficit limit.

We should not forget

A huge literature, economic and otherwise was developed towards the mid of the first decade of the physical introduction of the new euro money, against the 3% fiscal deficit limit foreseen by GSP, on the grounds that it was a “straight jacket” or a “fool’s bond”. A large number of economists and politicians were arguing that this limit is catastrophic for growth and so on. At that time everybody was favouring more spending and more borrowing.
The result was that many Eurozone countries and first of all Greece, either openly or by hiding their real deficits, continued to over-borrow in order to finance their overspending. Of course it was Berlin and Paris that had allowed this to happen, profiting from the southerners’ spending. Borrowing was then considered as a “natural” thing for everybody, governments and citizens alike. Then come crisis.

The new Treaty

Coming back to today’s developments, the amendment to the excessive deficit procedure under the new Treaty foresees that the decision-making to punish the culpable country will be more automatic than it was in the past: the euro area member states agree to support the Commission’s recommendations and proposals for Council acts (except where a qualified majority of them are opposed).

In addition, a member state which is subject to an excessive deficit procedure will have to put in place a “budgetary and economic partnership programme”.
The programme will include a detailed description of the structural reforms which the member state will have to implement in order to ensure an effective and durable correction of its deficit.

On top of that the new Treaty also says: “Such programmes will be submitted to the Council and to the Commission for endorsement. Their implementation will be monitored according to the rules of the Stability and Growth Pact”.  What if the culpable country is Germany of France? Will Berlin or Paris accept to be “monitored”? Or they will decide to form a qualified majority to avoid that?

It is more than certain that at the end of the day it will be again a political game, with the usual distortions and extortions. In short as long as the tough fiscal measures and the draconian spending cuts have been imposed on Greece, Portugal and Ireland either the new or the initial Treaty would have done the job, if Germany and France wanted so. The problem is what will happen if the excessive deficit procedure has to be applied to big ones? Will Paris agree to this? Rather no, and probably with the backing of Berlin, because the two of them make or break the rules together.

In short the new Treaty is just an additional intimidation for the three Eurozone countries already under Memorandum, plus Italy and Spain. It seems that in this affair the old and new threats are meant to be used by the major news media and the oppressive mechanisms in every country, to break the willingness of all Peoples to resist the Franco-German ruling elites’ dictums.


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