Broken promises hinder euro zone’s recovery


Portugal's Prime Minister Pedro Passos Coelho, German Chancellor Angela Merkel, Finland's Prime Minister Jyrki Katainen, (top row, left to right), Cyprus' President Demetris Christofias and Greece's President Karolos Papoulias (bottom row) pose during a family picture session for the two-day European Union leaders summit in Brussels on June 28, 2012. (SEBASTIEN PIRLET/REUTERS)
August 25, 2012

Even before it goes into effect, the European Union’s much-touted fiscal discipline treaty is being violated routinely by key governments and has little chance of winning across-the-board compliance from the bloc’s members, European economists say.

The gap between what E.U. governments announce they will do about the region’s two-year-old debt crisis and what they do in practice has been a big factor in continued skepticism among lending institutions that buy sovereign debt. That has helped prolong the crisis — as well as its dampening effect on the prospects of economic recovery in the United States.

According to the economists, part of the problem is that E.U. leaders have sought to inject confidence in the markets with ringing declarations that they could not back up. But another explanation, they said, is that bold steps agreed on at Brussels summit conferences often bog down when they encounter member nations’ bureaucracies, parliaments and constitutional idiosyncrasies.

The markets move fast, they noted, while governments tend to move slowly. Jean-Claude Juncker, the Luxembourg premier who has been a fixture of E.U. affairs for years, complained recently that since the crisis erupted, financial markets have forced the bloc’s leaders to act more quickly, eliminating time for reflection, negotiation and planning.

Although it is only one measure among many that influence market decisions, the fiscal discipline treaty has been the subject of particular attention because of the fanfare that has accompanied it, first when it was agreed on at an all-night summit in December and again in March when it was signed by all but two of the E.U. countries — Britain and the Czech Republic.

In response to market pressures for swift action to lower Europe’s chronic deficits and bloated sovereign debts, only 12 of the 27 E.U. countries were required to ratify the treaty before its target implementation date of January.

Nicolas Sarkozy, France’s president at the time, cited the accelerated ratification process as evidence that Europe was finally dealing with its indebtedness. German Chancellor Angela Merkel also pointed to the treaty as a sign she had converted other European governments to fiscal discipline as a response to the crisis.

Since then, however, only seven countries have ratified the document, according to E.U. headquarters in Brussels. And those seven include neither France nor Germany, the bloc’s most influential countries, which originated the treaty and pushed it hard on their fellow E.U. governments.

Germany’s ratification has been held up in a constitutional court that has promised a ruling next month. France’s new Socialist government has promised to submit the treaty to parliament in a few weeks, after gaining a modest separate agreement for growth measures, but it faces questioning from the party’s left wing, doubts among its Green allies and opposition from its far-left opponents.

“Austerity forever?” asked Jean-Luc Melenchon of the Left Front in a recent Q&A. “That is economic nonsense.”

More such opposition has come from an unlikely place: the Netherlands, traditionally known for its tight fiscal discipline. The Socialist Party candidate in Sept. 12 elections, Emile Roemer, has gained traction with a pledge that, if elected, he would simply ignore the fiscal discipline treaty that the previous government signed.

“The only thing a government can do in these times of crisis is to stimulate the economy,” he told the French news agency Agence France-Presse. “A special no to inane austerity.”

One of the treaty’s main requirements says that E.U. governments cannot have deficits surpassing 3 percent of gross domestic product. In fact, the rule already existed in previous E.U. agreements. But it was often set aside for what were described as extraordinary budget problems. The treaty, E.U. leaders explained, would end that laxness by imposing fines on countries that failed to meet the goal.

But the economic and financial affairs division of the European Commission, the European Union’s executive body, reported this spring that the 17 countries that use the euro on average are likely to register deficits amounting to 3.5 percent of GDP this year and 3.25 percent in 2013, when the treaty is supposed to be in effect.

Offenders, the commission said, include Ireland, with a predicted 8.3 percent deficit this year and 7.5 percent in 2013; Spain, with 4.5 percent this year and 4 percent in 2013; and France, with 4.5 percent this year and more than 4 percent predicted for 2013.

French Finance Minister Pierre Moscovici insisted his government will be able to get France’s average to 4 percent this year and 3 percent in 2013. But he based his calculations on a growth rate of 1.2 percent that economists have said is over-optimistic, given that so far this year French growth has flat-lined.

Greece, which is near bankruptcy and negotiating for more time to shave government spending in return for bailout loans, is expected to register a 7.3 percent deficit this year, with 2013 depending on the outcome of its talks. By contrast, Germany, regarded as the European Union’s good student, is heading for 0.9 percent this year and 0.7 percent in 2013, its spring forecast said.

A similar gap between declarations and practice has opened up in the E.U. bailout funds that were announced as guarantees that no member country would have to face a credit crunch alone, despite unwillingness by the European Central Bank to act as a guarantor of last resort.

The European Financial Stability Facility, set up in 2010, was supposed to be able borrow up to 440 billion euros to back up overly indebted governments. But David Gordon, head of research at Eurasia Group, and Douglas Rediker, senior fellow at the New America Foundation, pointed out in Foreign Policy magazine last month that in fact it has raised only about 30 billion euros.

Similarly, the European Stability Mechanism, a reportedly improved rescue fund due to take over later this year, was touted as a 500-billion-euro weapon against debt crisis. But according to the fine print, it was supposed to receive only 80 billion euros from euro-zone countries in contributions spread over the next 2½ years — and then raise an additional 420 billion euros in the same markets where indebted governments go to refinance.

“In an already difficult funding environment, it is hard not to be just a little skeptical that the rescue funds won’t necessarily have all the money they need exactly when they need it,” Gordon and Rediker wrote.

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