The EU Fiscal Compact: Righting the Bad Budget

EU leaders should act instead of producing more paper
Guy Verhofstadt, Jan 31, 2012

On Monday, the EU carousel stopped, briefly, for another round of note taking, deliberation and navel gazing. With so much chatter and babble over fiscal discipline, the leaders of the Eurozone seem to be marching to some orchestrated tune that is all too of familiar. The score is now familiar to most us.

The meetings in this case involved 27 European Union heads of state, with the usual matter of hammering out an arrangement for a ‘fiscal compact’ for current Eurozone members and those intending on joining the ailing zone. There were the usual noisy and disingenuous dissenters – Britain and the Czech Republic – who fear, with some justification, that the sovereignty of countries in the fiscal area is being hollowed out. (Officials of the latter point out procedural problems as the obstacle.)

The British refusal also has a legal implication. The veto being exercised by the Cameron government is also geared to prevent the agreement from becoming a valid treaty, something that London has made clear it will not accept. The risk the British are running here in delegitimizing the entire agreement is that they, themselves, risk being placed on the margins, the balmy army on the fringes of economic deliberation.

That said the agreement is problematic and troubling. A few pointers need to be emphasized. A lack of fiscal discipline by a member state would not be merely frowned upon but punished. Nor does the arrangement necessarily suggest ways the EU countries will grow. As Jose Manuel Borroso, president of the European Commission observed, ‘we need discipline, but we also need growth.’ And this is hardly going to be obtained by savage budget cuts. It is also questionable whether the pledges to ensure that businesses have access to credit, or creating the means of training more people, go far enough in achieving the objectives of the parties.

Guy Verhofstadt, Belgium’s former Prime Minister, made the weaknesses in the compact even clearer. ‘The new agreement consolidates fiscal discipline but omits completely to address the other side of the coin – that of solidarity and investment that will create jobs and growth.’ Deep cuts and financial slashing in the name of the pristine, balanced books might be all the rage to make investors happy and keep up confidence in markets, but one can hardly burn what one does not have to begin with. But this is the acceptable economist in action, the black magic of economic fantasy at work.

More problematic will be the behavioural changes that such a compact envisages. Laws perceived to be oppressive, unjust or simply unworkable do, in themselves, encourage lawlessness. Financial discipline is not something that can be imposed by central fiat and fear of retribution. Yet this is what is envisaged – the hope that the EU will, somehow, reach a state of financial good behaviour to be admired the world over, the good citizen of the balanced budget. All of this seems somewhat absurd given the tricky issue of Greece and the colossal task of reordering (the euphemism here is ‘restructuring’) its books. This is hardly a time for the optimistic financial expert.

What closer fiscal integration might instead do is corrode the relevance of domestic institutions and render states subservient to a broader, technocratic framework. That process is already well and truly underway.

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne.