Far from being a bold, decisive solution to the Eurozone debt crisis, the new fiscal treaty is almost entirely beside the point. Assuming one is prepared to indulge in a fantasy world where all it takes to make sovereign states forget their national interests and all it takes to make politicians forego tax cuts in aid of re-election is a written commitment to do so, there are still the small matters of housing bubbles, divergent economic trends and regulatory failure that played a part in the Eurozone crisis and have yet to be addressed. As I have argued previously, the sovereign debt crisis in the Eurozone cannot be traced to one single cause and each of its victims is suffering for distinct reasons. Look, for instance, to Ireland, where the strictest fiscal compact would have been ineffective in preventing that country from requiring a bailout in November 2010. The reason for this is that Ireland was a top student in the course of sticking to the Stability and Growth Pact, heading into the financial crisis with a debt and deficit of 28.3% of GDP and +.2% of GDP in 2007. The same can be said of Spain, arguably one of the toughest cases amongst the Eurozone’s peripheral states.
The enhanced discipline that is the aim of the fiscal compact is useful to the extent that it allows governments in creditor states to proceed with bolder rescue attempts. In other words, if what is necessary for Chancellor Merkel to support Eurobonds is the ability to point to some restraint on formerly profligate states as a precondition, then the fiscal compact is not entirely irrelevant to solving the crisis. Yet, if it is intended to pass as a genuine, comprehensive solution, not to mention a preventive measure for the future, then it is not only irrelevant, but also potentially damaging. That is, this fiscal compact may lure Europe’s leaders into a false sense of security, allowing them to forget how dire the situation remains and, further to that, it could reduce the pressure on Eurozone members to push ahead with essential, overdue reforms to make their economy’s more competitive in the long-term.
Spanish leader Mariano Rajoy’s revision of the government’s deficit target from 4.4% to 5.8%, almost immediately following the signing of the fiscal compact by 25 of 27 EU members, is timely in terms of preventing the latter situation from materializing. Rajoy’s admission that Spain would not meet it’s agreed deficit target hopefully serves as a reminder of the fact that even the strongest commitment to observe fiscal discipline, as well as a willingness to forego some sovereignty to that end, has no retroactive impact on the government’s existing balance sheet. A starker reminder still may be the situation of the Netherlands. One of the loudest voices amongst governments calling for increased fiscal discipline throughout the debt crisis, Prime Minister Mark Rutte’s coalition government now faces the task of finding cuts worth an additional 1.5% of GDP from the 2013 budget in order to avoid breaching the fiscal pact’s deficit limit of 3% of GDP. Although Rutte professes support for additional cuts, he may find himself isolated in that sentiment given that the Dutch economy is still in recession. Thus, even if fiscal hawks are prepared to write off the Spanish case as Southern Europeans’ lack of enthusiasm for discipline, it will be far more difficult to justify a Dutch failure to observe the new fiscal pact’s rules.
None of this is to make light of the significant accomplishment by Europe’s leaders in agreeing the 130 billion euro bailout to Greece, which can be released following private sector agreement to participate in a bond swap, nor is it to suggest that things are as dire as they were only a few months ago. Rather, what is meant is that these achievements do not amount to killing off the crisis, and in the presence of the fiscal compact, they may amount to a vindication for those actors who have advocated a singular focus on austerity and fiscal discipline for the present and future. This would be truly unfortunate, because with all the harm precipitated by the Eurozone debt crisis, one positive effect could be a realization of the need to rebalance the Eurozone economy, led by domestic consumption in the core, especially Germany, and export growth in the periphery. More significant still, it could lead to a decision to drive forward integration in the realm of economic policy, so complimenting the already deep monetary integration at the heart of (E)MU.