Monday, February 6, 2012

The Treaty After Next

I was debating the proposed new EU fiscal treaty on Charlie Bird's radio show on Saturday. It was a cosy gathering of 11 contributors including me - so there was limited time to develop any of the topics raised in the discussion.

Inevitably most of the discussion was about problems rather than solutions (e.g.: the legal case for a referendum etc). But what struck me was the obvious fact that the proposed treaty fails to address the key problems now facing Europe, and so we need to starting thinking about the 'treaty after next' as inevitably there will have to be another one.

Three key issues are ignored in the treaty as currently drafted. I call them the '3Gs', namely: Greece, Germany and Growth. The first one is obvious: Greece will have to leave the eurozone in the next two years (or two weeks!) - it's just a matter of how and when. The eurozone's politicians have wasted an opportunity to work out a clear mechanism for enabling a country to leave the eurozone, whilst minimizing the impact on the departing country's citizens and those remaining in the euro. It's a horribly complex task: but nevertheless a necessary one given the horrible problems facing Greece. It would be far better for Europe's future to have a transparent, feasible, democratic process for facilitating a country's departure from the eurozone (and eventual return if mutually acceptable) than the reality-denying nonsense that is the draft fiscal treaty as it currently stands.

The second issue is Germany: Europe and the eurozone's future now appears to be tied entirely to the political priorities of Germany. Which raises the obvious question: what will happen when Germany goes into recession - as it inevitably will? Over the past two decades Ireland has experienced inappropriate interest rate policies emanating from Germany as it struggled first with unification in the 1990s (pushing rates too high for everyone else); and then recession in the 2000s (pushing rates too low for everyone else). My guess is that a deepening recession in Germany will create domestic pressures for changes to the fiscal treaty, changes that will once again require intense political negotiations and, maybe, another referendum in Ireland. Given Germany's dire demographic prospects the rest of Europe will once again be dragged in a macroeconomic direction unsuited to the wider needs of countries like Ireland.

The final issue is Growth. The word is mentioned only ten times in nearly five thousands words of the draft treaty. The treaty will do nothing to get Europe (let alone Ireland) back on a sustainable growth path in the coming years. That is tragic for our country, simply because our 'growth potential' is higher than nearly every other member of the eurozone but we will not be able to realise it because of the skewed focus in treaty on balancing budgets and borrowing constraints.

On balance, the draft fiscal treaty is irrelevant to Ireland in the short to medium term - as argued by Colm McCarthy. The Irish government would be better off focusing its attention on lobbying for the treaty after next, one that will be better suited to the wider needs of the eurozone - including Ireland - and one more realistic about the future for Greece and Germany.

One idea: the Government should publish a draft treaty of its own for debate in Ireland, Britain and other EU countries that could ultimately form the basis for one that will have a meaningful impact on our collective futures. If we wait for the Germans to start the debate then I fear it will be too late.

1 comment:

  1. If it was me sitting up there in Brussels, I would have a very different analysis as follows.

    Greece - The difficulties in resolving the problems in the EU as a whole stem not from any economic impossibility of stabilisation, or any lack of knowledge as to what remedies would be effective. Rather, they stem from political difficulties in enforcing the necessary economic solutions. Economically it is true, Greece is dragging down the rest of the EU, and their jettison would have economic benefits. But there are far greater benefits to be gained in making an example of Greece. There would be massive benefits in the people of other troubled countries seeing what happens to a country who takes the line that Greece has taken. So, the messier the better. Greece is to be sacrificed to save the rest. The proper political will that is needed in the rest of Europe to effect the needed economic solutions will be generated in this way. I think Greece brought this on themselves.

    Germany - IS in recession, just it is handled differently. There was an article on this recently - There are people earning as little as 55 cents per hour; there are 4.3 million on very low wages; low-wage employment accounts for 20 percent of full-time jobs in Germany; new programmes of low-income, government-subsidized jobs are being brought in (similar to our own outrageous 'intern' scheme); one out of five jobs is a now a "mini-job," earning workers a maximum 400 euros a month tax-free. In anyone's terms that is recession.

    Growth - It is inevitable that our current assumptions and models of economic growth must be re-visited in the face of such factors as oil supply and geo-political and other factors affecting that supply; environmental factors; the increasing economic and social fall-out from the slumps that must inevitably follow the boom portion of the business cycle, etc... Unlimited growth ad infinitum is not realistic anymore. We would do well to revisit the essays written in the 70's by British economist E. F. Schumacher - Small Is Beautiful: Economics As If People Mattered.

    Anyway, it seems to me that there are indeed intelligent people in Brussels on top of the analysis needed, and trying to do the best that can be done within the very difficult constraints that currently exist. I am hopeful it can be all worked out for the best.

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