Stability and growth mark II

Economy | Fri 20 Apr | Author – Business & Finance
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What this treaty proposes is to set up in the law of the land an economic philosophy by no means universally agreed upon – with uncomfortable echoes of a previous folly, writes Tiarnán O’Corráin.

Swallow hard and prepare yourselves for yet another referendum on Europe.  This time it is the fiscal compact.  The freshly minted government website on the treaty (stability prattles on about it in that schoolmarmish tone we have come to expect from official statements in the age of the diploma in mass communications: “many steps have been taken to address this problem [the euro crisis] on a Europe-wide level to encourage recovery and to ensure that the mistakes of the past cannot be repeated.  This new treaty is proposed as an important part of this effort.”  So far so meaningless.

Government messages often seem designed to induce torpor – the very lack of specifics  “any steps . . . encourage recovery . . . mistakes of the past” makes it sound like a Richard Bruton stump speech, a sort of Michael Noonan without the mob boss menace. The site burbles happily along: “because not all Member States of the EU wished to participate, it was agreed to do this through a new Treaty what would sit outside the existing EU Treaties.”  No mention of David Cameron and the drama of the EU summit last December.

Vagueness aside, the problem with the above is that it elides the EU, an association of democracies in which we have long participated, and this new ad-hoc group of states bound by the fiscal compact. Effectively we are joining a new organisation by treaty. Of particular irony is the statement that the compact is seeking to avoid the mistakes of the past: it could equally be said that the compact is reenacting and reinforcing them.  A recent visitor to Ireland, prophetic economist Steve Keen, has been going about arguing, persuasively, that the euro crisis was so serious because all of the tools for dealing with such a crisis were removed.  So optimistic, so Panglossian were the drafters of the Maastricht Treaty that they seemed to believe that the euro would never encounter a crisis.

Given that exchange rate wrangling is an inevitable casualty of currency integration, they set about removing the rest.  Monetary policy was disposed of by creating a European Central Bank whose narrow terms of reference owned more to German paranoia about inflation than any desire to deal with the crises of the future.  The Stability and Growth Pact attempted to do the same for fiscal policy, though the freedom with which the latter was treated by its most enthusiastic architects threw that into question.

Now we have Stability and Growth mark II, and its looks as if Germany, in its desire to avoid the mistakes of the distant past, is going to repeat those of the recent.  Angela Merkel was much derided for her evocation of the Swabian housewife argument for fiscal prudence: the government’s own website talks of budgetary rules intended to “ensure good housekeeping”.  Not too far off Merkel’s statement.  It is clear where the script is coming from. To the specifics.  The treaty’s main provisions are:  all budgets shall be balanced or in surplus.  Amusingly, this is defined as any situation where the structural deficit is 0.5% or less.  So a deficit can be a surplus, under the right circumstances.  The 0.5% limit is a lower limit: readers of the treaty are sent scurrying along to read the revised Stability and Growth pact, where the true structural deficit limits, which differ for each country, are to be found.

Most interestingly, the compact provides for an automatic correction mechanism to be invoked whenever a country fails to adhere to the above, and sets the European Court of Justice up as the arbiter of whether this mechanism (and indeed the provisions of the entire treaty) has been satisfactorily transposed into domestic law of “a permanent character, preferably constitutional”.

Let us pause for a moment to consider what this means.  It is here proposed to set up in the law of the land an economic philosophy by no means universally agreed upon.  Any future governments voted into power by the people would be bound by this philosophy, whether or not they and their voters agreed with it.  In other words, the democratic right of Irish voters to choose how they wish to be governed, foolish as their choice might be, is being seriously abridged.  It used to be the case that economics were subordinate to politics, that voters’ choice of a government was partly a choice of an economic philosophy, along with social educational and juridical philosophies. They were free to renege on their choices, to change their minds. They were, in a word, sovereign.  Now it seems that this generation of voters will choose which parameters within which that sovereignty can be exercised, once and for all.  A weighty responsibility indeed!

The EU was once celebrated, justly, for its achievements in accommodating diverse languages, economies, and cultures in a peaceful and constitutional union.  Now it looks as though a particularly conservative, Swabian version of Ordoliberalism is to be imposed as the one true economic philosophy, on pain of penury.  There may be compelling arguments for this, and I am sure many of them will be aired before the referendum, but this has uncomfortable echoes of a previous folly.

The late unlamented FF governments were criticised for using a temporary infusion of cash (stamp duty receipts from the property boom) to fund something permanent (the increase in the size of the public sector that is a major contributor to our structural deficit.) Now this government proposes a permanent quasi-constitutional change in order to secure temporary access to funding.  It is very like a mirror image, and in a mirror one sees oneself, not one’s opposite.