Those of you who have followed the developing Eurozone crisis have certainly heard of the fiscal compact, previously called fiscal treaty or fiscal union, that the powers that be within the EU has tried to set up to control the budgeting procedures within each country in the union.
Basically, the Eurozone, which currently is only a monetary union (meaning they have the same currency and central bank), will become a fiscal union as well. Countries will not be allowed to run deficits of more than 0.5 % of their GDP, unless these deficits are approved by the other countries. In effect, if you want to borrow money, you’ll have to ask France and Germany for permission. Also, no country will be allowed to have a debt higher than 60 % of their GDP. The idea is that through harmonizing tax rates and debt levels, we can avoid some countries being in a boom while others are in a bust, and we can avoid state bankruptcies that threaten to unravel the whole European project.
Ireland is now going to hold a referendum on whether or not to agree to this fiscal compact. The government did not initially want one, but the Irish constitution (which, by European standards, is a really good constitution) does not allow the government to give away this kind of power to a foreign entity without first holding a referendum about it. So now, in just about two months, the Irish will go to the polls to decide whether to sign up to this fiscal compact.
Does the fiscal compact sound good? After all, as conservatives, aren’t we against deficits? We certainly are. Yet, I firmly believe Ireland should reject the compact. Here is why:
1) Bond yields will go up. This is something a lot of people will dispute, but it’s quite well-known by now that having no independent monetary policy leads to discounted bond prices. Investors – all other things being equal of course – seem to simply prefer independent countries that retain as much power as possible over their economies. Now, given that investors have already shown their dislike of countries that give up their monetary policy independence – imagine what will happen with the bond yields of countries that give up their independent fiscal policies as well. Yes, that’s right, yields will go up even more. Not the best thing for a country that is trying to return to the markets.
2) Germany and France – not reliable as economic experts. I wrote about this in my last post on this subject; how Germany is the real economic basketcase in Europe. Germany’s growth was stagnant for half a decade at the start of the 2000′s, which coincidentally was the same time as the Irish economy was booming. This is why the ECB lowered interest rates, to boost the German economy while overheating the Irish one. The Germans basically think the Irish have themselves to blame; had they only raised taxes to compensate for the low interest rates, everything would have worked out fine. Of course, the Germans themselves could have lowered their own taxes to boost their economy instead of just injecting cheap credit, but I guess that was just too much work for them.
To give these countries – who are obviously only interested in their own well-being, not in that of Europe’s – even more influence cannot be justified. If they didn’t care about you then, why would they care about you now? Imagine the mess Germany could cause with the power to reign in other countries budgets and “harmonise” (and that means raise) the tax rates. They’re no economic experts, the Germans and the French. And they don’t care about you at all.
3) No more bailouts? They’re bluffing. Germany and France, ie the powers that be, have threatened Ireland and the fellow PIIGS countries by making it clear that any country that does not sign up for the compact won’t ever receive any assistance from the rest of them again. In other words: No more bailouts. They’re bluffing. Angela Merkel wants the Irish (and the Greek, and the Spanish etc) to believe that they bailed them out because of old friendship’s sake. They didn’t. The reason was purely financial – German banks happen to sit on billions worth of Irish bonds, and it just seemed cheaper to bail out Ireland than to bail out the German banks (which is what they would have had to do had Ireland defaulted). This financial incentive is still around, and so the bailouts will still be around if Ireland were to ever need another one. I’m not a big fan of bailouts, but by all means don’t vote Yes because you’re afraid Ireland won’t receive any more bailouts if you don’t. Now, if Ireland does vote No and does end up needing another bailout, the next one will probably not be called a bailout as that would mean that Germany and France would lose face, but they’ll save you still, one way or the other.
4) Don’t throw away independence – you never know when you might need it. There is no exit from the fiscal compact. What Ireland has done so far is bad: Indebted itself for generations to come. Buying stuff on credit and sending the bill to your grandkids is bad enough, but taking away your grandkids independence? That ought to make Ireland a good candidate for the “Worst grandparent of the century” award. With no monetary nor fiscal policy, and most other political areas already regulated by the European Union, Ireland (and the others) will certainly have taken the final step towards becoming a German vassal state.
5) The basic problem is not resolved. The reason why the Eurozone countries are not in sync, business cycle-wise, is far more complicated than just the fact that some countries like to put on more debt than others. All this compact does is stopping countries from running large deficits and having a national debt over 60 % of GDP. It does not, however, stop countries from subsidizing certain industries (like housing, in Ireland’s example). If an industry is going through a bubble, caused for instance by cheap credit, and a country decides to subsidize it instead of trying to deflate the bubble, then that country is going to be hit so much harder once the bubble bursts. So just because you have debt, tax and other forms of harmonisation, does not mean you’ll end up with a harmonised business cycle. In addition to that problem, the countries within the Eurozone are quite different: Ireland is high-tech, Spain and Greece relies to a higher extent on agriculture and tourism. A bad tourism season together with a tornado, and Greece will be in recession – and this could happen at the same time as the German economy is booming. Because of this, the Eurozone with its current set of members is an unworkable construction.
6) Politics. It’s not that the fiscal compact is such a bad idea in theory – having a debt below 60 % of GDP and a deficit below half a % of GDP is in general two pretty good ideas. It’s politics that makes the execution of it harder than it is on paper. You see, these rules are very negotiable – if you can convince the others that they should allow you to make an exception and have a higher deficit than you’re normally allowed to, then you can get away with it. So how to convince everyone else? Why, promise them a counter-favor of course. “I’ll vote not to punish you for your deficit if you vote for not punishing me for mine”. Political vote-trading is hardly new and in the EU, it has made virtually every inconvenient rule ineffective. Remember, there already is a rule saying no country is allowed to run more than a 3 % deficit – how well has that worked out? Germany and France were the first countries to break that rule!
On the same note, since this is politics we’re talking about, expect more regulations under way. The fiscal compact is not enough; in the end, the EU will need to have the power to actually change a country’s budget (decide what it should spend money on etc) in order to accomplish what it’s trying to accomplish – a harmonised Eurozone (and even then it’s not certain it’s possible).
For me as a conservative, deciding not to support this compact was not an easy thing to do. After all, I’m absolutely against deficit spending. But one thing I find even more scary than deficit spending is the idea of a European superstate; a United States of Europe.
While the Irish cannot prevent the compact from coming into effect, it can choose not to join it and send a message to the European elite, and that message is a message they need to hear: We don’t want your superstate. We didn’t fight off the British just to become a Vassal state under Germany.
The reason the Eurozone is not working is not because the politicians in the European parliament and commission don’t have enough power – although like all politicians, that’s the case they make whenever something goes bad. “Please promote us and give us more responsibility so we can fix the things we’ve screwed up so far” – can you see anyone successfully making that case in a private company? Yet it happens all the time in the political world.
We still don’t have a date for the referendum. But whenever it happens (and it will be soon), I urge all my Irish friends to vote NO to the Fiscal compact.