Wednesday, 7 December 2011

New euro 'masterplan' already showing flaws

The EU is this week limbering up to reveal a last-ditch 'masterplan' to save the euro.

Over many months, a succession of summits have invented ever bigger sums of money the EU intends to throw at the eurozone debt crisis without any concept of how to achieve them.

So far the EU's only strategy seems to have been to try to intimidate the markets into submission rather than come up with a coherent solution to the euro's glaring flaws.

Clearly, and unsurprisingly, that hasn't been working. Not only has the lack of detail behind every EU pronouncement failed to convince, but the perpetual indecision by the EU has demonstrated amply what has for some time been a central tenet of eurosceptic thought.

Namely, that the EU as a decision-making structure is too rigid and incapable of acting with the dynamism required to secure Europe's success and prosperity in our fast-moving 21st century world. The EU, being a 1920s idea founded on a 1950s view of the world, has never looked more out of date.

In this context, it's hardly surprising that the ratings agencies have continued to criticise and downgrade the credit-worthiness of euro member countries.

Flawed auto-sanctions

But this week, the EU has finally changed tack. Talks led by the 'Merkozy' partnership of the French and German leaders have shifted from broadcasting fantasy funding plans to discussing 'refounding' the EU through treaty changes that will enforce 'fiscal union'. The plans are being touted as what the eurozone needs to survive in its current form.

More details will emerge later this week, but one of the key measures already being proposed is the idea of automatic sanctions against those countries that breach eurozone borrowing rules - particularly the rule that budget deficits should not exceed 3% of GDP.

Yet, 23 EU countries, including 14 eurozone members, are already in the EU's 'excessive deficit procedure' as a result of breaching this 3% rule which, under the current Stability and Growth Pact, should already have provoked sanctions.

This is despite the fact that the rules of the original Pact were softened in 2005, with 'exceptional circumstances' being permitted for deficits above 3%, 'other relevant factors' allowed to be taken into account before a deficit is considered excessive, and longer deadlines for corrective action.

According to the EU Treaty, sanctions can include requiring euro countries to publish additional information before issuing bonds and securities; inviting the European Investment Bank to reconsider its lending policy towards the country; requiring the country concerned to give the EU a non-interest-bearing deposit until the excessive deficit has been resolved; or, finally, imposing fines of an "appropriate size".

If auto-sanctions are approved in the looming negotiations, unless made retrospective, only Finland, Luxembourg and Estonia would potentially be subject to them as only those countries are not currently in the excessive deficit procedure.

This would render the proposal effectively usless towards having a short term impact on problem countries nor, in any case, will they be any solution to the underlying debt and growth problems of economies in difficulty. They simply punish, don't resolve.

Key questions

Now EU leaders are lurching back towards toughening the Pact up again, this provokes a series of further questions.

Firstly, given sanctions for excessive deficits have been available to the EU since the euro launched, why exactly have none ever yet been applied under the current Stability & Growth Pact rules?

Secondly, will the 14 euro countries already suffering 'excessive deficits' be let off auto-sanctions until they get back on track and then fined only after future transgressions? How much will future breaches cost them?

More broadly, how will automatically imposing financial sanctions on these countries help them get out of their debt and low growth problems that tend to provoke excess deficits in the first place? Won't such sanctions simply make their economic problems worse, and is that why none have ever yet been applied?

Referendum unlocked?

Finally, this proposal also provokes a key political question for David Cameron on the question of a referendum, since what is being proposed, in respect of auto-sanctions at least, is basically a beefing up of the existing EU Stability and Growth Pact.

Despite not being in the euro, Britain is subject to the Stability Pact rules and committed to "endeavour to avoid an excessive government deficit", although we are not bound by the penalty clauses should our endeavours fail. This was a key element of our opt-out from euro membership. We are, however, one of the nine non-euro countries also currently listed as being in the excessive deficit procedure.

If the mooted treaty changes centre on amending the Stability Pact clauses, the Prime Minister had better ensure our euro opt-out protocol is amended to exclude Britain from the new measures. If we are drawn into the new auto-sanctions, it will impossible for David Cameron to avoid holding a treaty referendum, since his 'referendum lock' will have been prised open.

Reality check

As Conservative MEP Roger Helmer put it this week, asking whether the euro can be saved "is like asking a cancer patient how we save the tumour. The euro is the disease, not the patient."

Prosperity and democracy on our continent are what needs to be saved and that's more likely if the rigidity of the euro is abandoned for at least several of its current members.

It's time for Europe's political leaders to drop attempts to save their ill-judged euro project, admit it's doomed at least in its current form, and start instead planning how to mitigate the effects on the financial system of several departures.

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