The new treaty on fiscal discipline cannot alone address the euro crisis and while there has been renewed talk of growth by EU leaders, current plans have proven "pitifully weak," says Carole Ulmer.
Carole Ulmer is director for relations with EU institutions at the think tank Confrontations Europe and the editor-in-chief of its monthly publication 'Interface', in which this commentary was first published.
"Europe is currently in a phase of relative rest (although the Greek problem remains a concern and Portugal is showing worrying signs). The actions taken by the European Central Bank coupled with the serious policies of the Monti government have reduced the risk of short-term financial implosion. Does this mean the crisis is over? Unfortunately not.
Are European leaders making the most of this phase? After the European Summit of 30 January, 25 of them agreed on a Treaty for Stability, Coordination and Governance and 27 approved a statement on growth and employment. Useful, or an empty gesture?
The treaty is essentially an agreement on the need for tougher national fiscal rules. It gives greater legal force to the golden rules and strengthens the devices for monitoring national budgets and sanctions. Article 3 stipulates that government budgets must return to being 'in balance or in surplus', and that the structural deficit should not exceed 0.5% of nominal GDP over an economic cycle.
The German strategy prevails, reflecting a desire to avoid repeating the Greek experience and that seen in Italy last summer (reforms announced, then withdrawn after a successful bond issue), and to force member states to adopt the structural reforms deemed necessary.
Undeniably, many countries are facing major public debt problems. But there is no shared definition of the structural deficit variable and, above all, the golden rule has to be contextualised and adapted to the situation in each country, notably taking into account the investment expenditure needed to ensure that austerity does not plunge us into recession.
In addition, a treaty focusing only on the reduction of public debt when private debt is even heavier avoids the difficulties of deleveraging. To overcome the crisis, public 'deficits are both the natural counterpart and the principal facilitator of the necessary private sector deleveraging,' says Martin Wolf of the Financial Times. Only a surplus external balance can help reduce state deficits in the context of private sector deleveraging. Yet, by definition, not everyone can be in surplus! So fiscal tightening must indeed be selective, and cooperation will be required between member states.
In addition, fiscal discipline will not solve everything. Mario Monti insists heavily on this point and awareness is slowly increasing, as demonstrated by the adoption of a text on growth. But it is pitifully weak! We must 'complete the internal market', when what we actually need is a major renewal, and 'increase financing, particularly for SMEs'… We have already said that! Are we not missing the fundamental problem, namely that of intra-EU competitiveness gaps?
Although there can be no doubt that a treaty between countries wanting to consolidate the eurozone will prove beneficial, various forces have come into play undermining the initiative announced in December. The Commission and the Parliament, which only swear by the Community method, should however not be delighted about that.
This method has failed in recent years either to build any form of coordination worthy of the name, or to promote new common policies. The crisis has revealed everything that was lacking to support the euro: common policies on training, employment, industry and reinforced cohesion; stronger modes of integration; and synergies between national budgets and a proper EU budget. All these have been missing for the past 20 years!
The situation is critical. An increasing number of people are predicting the collapse of the euro area and populist temptations are multiplying. Let us not play with fire – the very unity of the European Union is in the balance.
It is important that we see this treaty as a first step in convergence, which must be greatly improved. We need to push for a more effective firewall, for a solution to the Greek issue, for the adoption of an employment policy and for the launch of Eurobonds. It is also time to address the issue of the new division of power between the member states and the Union that must come with sharing a common currency. The fundamental consolidation of the eurozone has to become a political objective, as of today."