Extension to Include Economic Growth, Employment and Social Cohesion
The crisis has highlighted the inadequacy of the Maastricht architecture. The one-sided emphasis on public debt has led to the neglect of the enormous problem of private debt levels. The hopes invested in self-adjusting economic structures have not been realised by the unified monetary area. Instead, economic heterogeneity in Europe has increased as the macroeconomic imbalances plainly show. This is primarily due to the lack of a common economic and fiscal policy, which would have a balancing effect and promote cohesion. Contrary to a European approach, the Member States, on surrendering the exchange rate instrument, were pushed into a downward competitive spiral of low wages, low taxes and low social spending.
The Fiscal Pact entirely overlooks these blatant defects of the Eurozone. Instead, it concentrates exclusively on the regulation of state budget deficits and debt levels. No one denies that Greek financial policy has been fundamentally unsound for years and that the country should never have been admitted to the monetary union. This description does not apply to the other crisis states, however. Ireland and Spain, for example, complied with the Stability and Growth Pact in exemplary fashion right up until the outbreak of the global financial and economic crisis. Thus the stricter budget policy rules that are now to be implemented with the Fiscal Pact would not have prevented the current crisis. On the contrary, the potentially fatal effects on labour markets and growth of the putative remedy, austerity, are all too evident in southern Europe and the states concerned are being driven into a vicious circle of ever increasing debt.
Transforming the Sham Fiscal Pact into a Real One
The Fiscal Pact is not what it pretends to be, even linguistically. It is not aimed at a »fiscal union« because the abovementioned defects of the Maastricht Treaty remain. In fact, the highly problematic asymmetry of a monetary union without political union has been exacerbated, tacitly condoning fragmentation of the EU. This fragmentation will in future be distinguished less by the »debt brake« than by the existence of a group of economically and socially disconnected states. In order to prevent this and despite the precarious circumstances in the crisis states – recession, high unemployment, rising poverty, increasing political radicalisation – the present Fiscal Treaty must be expanded. This expansion must, however, not merely be symbolic as in 1997 when the Stability Pact of the emerging monetary union was expanded into the Stability and Growth Pact, even though it did not differ one jot from the monetary principles of the German government and the Bundesbank. What is now needed, therefore, is more than a fiscal and growth pact that does not even live up to its name. Supply-side structural reforms must be complemented by demand-side measures.
The Treaty has been signed and some countries have already ratified it. Complete renegotiation is therefore unlikely. Even a newly elected French President will not repudiate an international treaty signed by his predecessor and risk undermining the credibility of future transnational agreements. However, it would be quite easy to attach a protocol to the Fiscal Treaty. According to Art. 2 (1a) of the Vienna Convention on the Law of Treaties all documents of an international agreement count as elements of the treaty; a protocol thus has the same legal validity as the text of the treaty to which it belongs. A protocol to the Fiscal Treaty could, on one hand, reassure those who do not want its budgetary policy provisions to be diluted or thrown overboard, while on the other hand such a supplementary document could take account of all those aspects that are not adequately regulated in the Fiscal Pact.
A Commitment to Growth Is Not Enough
In terms of content, a mere commitment to economic growth is not enough, given the urgent crisis in the Eurozone. Rather the Fiscal Pact must be expanded into an instrument for creating a genuine fiscal union. The goal must be to link budgetary solidarity with a protocol for economic growth, employment and social cohesion supplementing the Fiscal Treaty. This would include
- An EU Debt Repayment Fund;
- A European New Deal;
- A European Social Stability Pact;
- Optimised European Governance structures, e.g. with a joint parliamentary Economic and Financial Committee.
Factoring-in Economic Performance
The individual elements of a protocol to the Fiscal Treaty proposed here are new in respect of their repudiation of the one-size-fits-all approach taken so far in the European integration process, in favour of a thoroughgoing orientation towards economic capabilities of individual states. All too often it has been the case that Community regulations have expected too much of some states, while letting others off the hook. What I am proposing is to bring debt repayment paths and entitlements to benefit from the Eurobond system, the cash flows to be expected from a financial transaction tax earmarked for combating the recession and the regulation of internal European competition with regard to wages, taxes and social spending into line with the individual socio-economic situation of the participating countries.
The full paper “The Fiscal Treaty Needs a Protocol. Extension to Include Economic Growth, Employment and Social Cohesion” can be downloaded here: http://www.fes.de/cgi-bin/gbv.cgi?id=09202&ty=pdf
This article is part of the European growth strategy expert sourcing jointly organised by Social Europe Journal, the Friedrich-Ebert-Stiftung, the Bertelsmann Stiftung, the IMK of the Hans Boeckler Stiftung and the European Trade Union Institute (ETUI).