ANALYSIS:IN THE face of relentless market pressure, euro zone finance ministers have taken key steps to avert any repeat of the fiscal meltdown in Greece with a deal on the final shape of their €440 billion guarantee fund for distressed single currency members, writes
ARTHUR BEESLEY
They have also resolved in principle to submit draft national budgets to Brussels and their counterparts before parliament, opening clear potential for friction if the proposals are not to the liking of their peers.
Each of these measures stands as a big expansion in the reach and depth of the European economic system. That they have been agreed in a matter of weeks neatly illustrates just how the currency’s precipitous decline – down almost 20 per cent against the dollar in six months – has led the EU authorities to feverishly recast the euro’s moorings.
The strain shows everywhere. Even as EU finance ministers gave a nod of approval yesterday to new austerity plans from Madrid and Lisbon, Spanish civil servants walked off the job in protest at the cutbacks. Premier José Luis Zapatero faces the prospect of a general strike in the coming weeks if he fulfils his pledge to reform rigid labour laws.
German chancellor Angela Merkel, whose country is the biggest individual contributor to the Greek rescue and any further bailouts, is advancing a four-year savings plan to trim her national budget by €80 billion. In defiance of French demands for Merkel to stimulate domestic demand, the plan includes the elimination of 15,000 public sector jobs.
Even beyond the euro zone, austerity is the new vogue. As Britain prepares for an emergency budget in a fortnight, newly installed prime minister David Cameron has public pay, pensions and welfare benefits in his sight in cuts that will hit “every single person” in his country as he tries to drive down the £156 billion (€188 billion) budget deficit he inherited from Gordon Brown.
In Hungary, meanwhile, prime minister Viktor Orban saw his administration inflict grievous self-harm last week when officials compared its fiscal position to Greece and warned of a possible debt default. The Hungarian forint dived, and the euro followed suit. Budapest quickly tried to regain face, saying the comments were overboiled and far from a fair reflection of the fiscal position.
But the damage was done. As Luxembourgish prime minister Jean-Claude Juncker arrived at a sparse conference centre on Monday to chair the monthly meeting of euro group ministers, he said Hungary was not in danger but made clear his annoyance at the loose talk: “I only see the problem that leading politicians from Hungary talk too much.” Juncker had come from a meeting with Dominique Strauss-Kahn, the International Monetary Fund (IMF) managing director who is widely held to be preparing to challenge Nicolas Sarkozy for the French presidency in May 2012.
Whatever about Strauss-Kahn’s ultimate intentions, the IMF’s €30 billion contribution to the Greek rescue and its €250 billion commitment to the general rescue net mean the Washington-based organisation is immersed as never before in EU affairs. At this stage, it is beside the point that such involvement is anathema to many top Europeans.
Strauss-Kahn presented an IMF report on the euro area to the ministers, a five-page missive notable for the absence of loose language. “The immediate crisis response has been bold, demonstrating the euro area’s capability to act together when pushed,” it said. “But crisis management is not an alternative to the corrective policy actions and fundamental reforms needed to reinforce the foundation of European monetary union.”
Immediate action was needed on several fronts: to establish fiscal sustainability, spur growth, accelerate financial system restructuring, and strengthen EU economic governance. “The focus should be on enforcing budgetary discipline, helped by fundamental legislative reform, and on addressing macroeconomic imbalances.”
Ministers went some of the way down this path at a follow-on meeting on measures to strengthen the euro rulebook, chaired by Herman Van Rompuy, president of the European Council. Even though proposals for tougher central surveillance are riddled with potential for political tension, Van Rompuy said there was broad agreement to subject draft budgets to external scrutiny in a process to be known as the “European semester”.
“In the spring, national budgetary plans would be presented to the commission and EU member states – of course, not to be checked in detail or to be decided upon by the European institutions. That is the prerogative of the national parliaments. However, the main assumptions underlying the budgetary plans, like the levels of growth or inflation, would be examined.
“So would the main aggregates, like total revenues, total spending and deficit targets. Timing is key here. A government presenting a budgetary plan with a high deficit will have to justify itself in front of its peers, amongst finance ministers.
“Since this would take place as early as the spring, there would still be time to adjust the plans before the final budget is presented. Moreover, a national parliament would be able to judge its government’s budget plans knowing fully their credibility.” This is precisely the sort of stuff that prompted ructions in the Dáil not so long ago amid Opposition claims that national fiscal sovereignty was under dire threat. Minister for Finance Brian Lenihan has agreed to participate in such scrutiny, however. Although parliamentary scrutiny of draft budget plans appears likely, the timing is not at all clear.
Perhaps the most sensitive part of the semester scheme is the suggestion countries would be asked to amend plans if their proposal falls foul of the commission or other ministers. Without this, the system would have no teeth. But putting it into practice raises the prospect of unseemly international squabbles over national policy, something political leaders would not relish. This might encourage leaders to keep within the rules.
The fear must be, however, that exceptions would be made for political reasons, giving errant governments a free pass. There is precedent for this in Europe. Fines envisaged under the existing system were never handed down. Similar concerns surround proposals to impose earlier penalties on countries flouting the euro rulebook. “Sanctions could already kick in before the 3 per cent threshold for the annual deficit is trespassed, for instance if warnings have been neglected, or if the level of debt rises too quickly,” Van Rompuy said.
Still to be defined, however, are the scale and scope of the sanctions themselves and the conditions under which they would be imposed before an infringement takes place.
Yet all signs point to financial penalties. While the suspension of euro group voting rights has been raised, Van Rompuy said anything other than a fine would require a change to the EU treaties. The concentration at present is on measures that would not require treaty change, he said.
In addition to all this, the prospect of giving greater emphasis to the public debt element of a country’s national finances is also on the table. Corrective procedures would be triggered “earlier for countries where debt is not reduced quickly enough”, said Van Rompuy.
Each of these measures is still subject to the approval of EU heads of state and government, who gather in Brussels for their annual summer summit next week. It is difficult to imagine, however, that finance ministers would sign up to far-reaching proposals if their leaders were likely to reject them.
In the near-term, further measures to establish a permanent crisis resolution mechanism and to improve economic co-ordination will be discussed. These questions, too, raise numerous sensitivities.
This is the state of play. When not fighting fires, the European authorities are trying to rebuild the house. It ain’t easy.