The Fiscal Compact is a hastily conceived document that was agreed between a number of EU governments at a crisis meeting on 9th December, 2011 when the euro appeared on the verge of collapse.
It derives from a faulty analysis of the euro crisis and its link to an orgy of financial speculation. It does not focus on imbalances at the heart of the euro – between a high ‘savings’ ratio in Germany and high levels of debt in the peripheral countries. Nor does it deal with the explosion in de-regulated banking. Its sole focus is rather on public spending.
Yet the rise in public spending is a consequence – not a cause of the economic crisis. Sovereign states were forced to bail out banks and this led to a rise in their borrowing costs. The Fiscal Treaty would have done nothing to stop the crisis that occurred in 2008 because Spain and Ireland were within its targets.
The core of the treaty is contained in Article 3 of the treaty which states that ‘the budgetary position of the general government shall be balanced or in surplus’. This is deemed to occur if the ‘structural deficit’ does not exceed 0.5%. The requirement for a balanced budget must be transposed into national law, and ‘preferably’ put in the constitution.
Many people instinctively support the ideal of a balanced budget. However, countries are not like individuals and there are times when a state needs to stimulate an economy through extra spending. Those who argue this are usually influenced by the writings of John Maynard Keynes.
Under the impact of the Wall Street Crash of 1929, Keynes challenged the idea that markets should be left to rectify themselves and argued instead for greater state intervention. During a recession, he pointed out, domestic demand shrinks and capitalists often refuse to invest. The state was the only force in society that could start spending and so the old, orthodox ideas about ‘balanced budgets’ should be thrown out.
The Fiscal Treaty would make these moderate policies effectively illegal. Governments would be put into a straight jacket and be subject to greater control from an unelected EU Commission. They would be forced to stay within a 0.5% range of their structural deficit.
Yet strangely there is no agreement among even mainstream economists about how to calculate this structural deficit. The German Bundesbank states that calculation of the structural deficit is ‘relatively complex, opaque and elastic on account of the numerous discretionary modelling options’. [i] In other words, you get different results based on what model you use.
Voting Yes means ceding more control to the EU Commission to impose ‘corrective action’ on us – in the name of a mysterious economic concept upon which there is no agreement.
The Treaty therefore represents a profound attack on democracy. It gives the EU Commission more power to lay down guidelines to determine ‘‘the nature, size and the time frame of the corrective action to be undertaken.’ It forces countries to accept their recommendations for ‘structural reform’. It allows them to direct local economies through an insane combination of extreme bureaucracy and neoliberalism.
To keep our sanity, we need to Vote No.
Kieran Allen 29. 5. 2012