The new fiscal pact

The medicine that may end up killing the patient

, by Joan Marc Simon

 The medicine that may end up killing the patient

A new international accord between the majority of the EU countries - a treaty on “Stability, Coordination and Governance in the Economic and Monetary Union” - was born last night –Monday 30th January-. Presumably the bearers were 27 EU leaders but 2 of them refused, for the time-being, to adopt the new-born. The birth took place behind closed doors and no representative of the European peoples was allowed in the room.

Now the 25 member states will start the long and cumbersome march of ratification in the respective national institutions. However this treaty, differently to the custom EU treaty ratification process, would enter into force as soon as 12 Eurozone countries will have ratified it.

The purpose of the treaty is to impose long-term fiscal and financial stability to the member states, the underlying assumption being that this should bring about growth. Many leading political figures and economists raised their voices to argue the impossibility to generate the latter solely with the former. Yet, the only initiative to stimulate the European demand has come from the Commission President J.M. Barroso has proposed to reallocate funds originally intended to regional policies. As much as this should be welcome, the amount considered is clearly insufficient to give the boost the European economy needs.

On the request of Germany, the decisions taken during the summit were mainly about enforcing mid and long-term austerity measures. The treaty is being referred to as “fiscal pact” but this name is misleading because all the measures go in the direction of reducing expenses and restricting budgets. No real fiscal solidarity between states is being established. In other words, if a country is in a downward spiral there is no mechanism to transfer income from surplus to deficit countries, instead the country should ask for help to the European Stability Mechanism, an intergovernmental organisation. The Eurozone might qualify as a monetary union but for sure not as a fiscal union. It is important to note that, the European parliamentarians, i.e. the elected representatives of the citizens of Europe, have not been part of this dramatically important process. The new treaty will use the European Commission and the European Court of Justice to enforce the rules but the European Commission has seen its powers removed like never before and has de-facto become a secretariat of the European Council.

Taking a step back to regard the process of European unification, this treaty reaffirms the coup d’état given by the states to the integration process. Since the crisis started in 2008 any pretended solution, from the EFSF to this “fiscal pact”, has increasingly downgraded the European Commission and consistently ignored the European Parliament. This dynamic has not brought about benefits; whereas the financial crisis of 2008 was caused by the US and the financial markets, the current economic crisis has its roots in the actions taken by the Franco-German directoire and in the inaction of the EU as a whole. It is hence worrying that this treaty will continue administering the medicine that may end up killing the patient.

A real European solution requires more than governance; it requires a government. The Franco-German directoire has proven ineffective in governing the crisis precisely because it has put the national interests before the European interests. During the last years the communitarian institutions have proven to be as effective in pursuing the common interest as they have been incapable of showing the necessary leadership. The only way the European Commission can stop the tendency of becoming the Council’s secretariat is if it manages to gain legitimacy in front of the European peoples. Therefore, it is necessary that the next European elections are not only about the European Parliament but also about the election of the leader of the European government. i.e. the President of the European Commission. Once such a leadership is established, it will be possible to create a proper EU budget and an EU treasury capable of replacing the “fiscal pact” with a real fiscal union.

This intergovernmental treaty is neither a solution to the short-term problems nor it will be the long-term solution to the problems of Europe. However it can be an intermediate solution in the run-up to the construction of a real European government which could emerge from the new EP elections in 2 years’ time.

There is still time but... is there political will?

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