LAST week’s marathon EU summit went largely as expected. The main discussion point has been David Cameron’s use of the veto to keep the UK out of the agreement. This leaves the other 26 countries in a bit of a bind.
Seamus Coffey: EU leaders are doing their best not to face up to the real problems we face
Most of them, particularly the eurozone members, want to press ahead with deal that was struck but in the absence of unanimous support they will have to do it outside the existing structures of the EU. We now have a 27-member EU, a 26-member group forging ahead with a reform plan, and a 17-member common currency zone that is in huge distress. There are going to be lots more meetings at European level.
But what of the plan itself? It is not clear what was being discussed in the early hours of Saturday morning but it seems that the EU leaders are doing their best to avoid facing up to the problem that actually exists. This is a sovereign debt crisis and last week’s summit did very little to alleviate that.
The outcome was a reform of budgetary rules that already exist. A 3pc of GDP limit was set on annual deficits and a 60pc of GDP limit was set on total government debt. These rules formed part of the Maastricht Treaty that came into effect in 1992. The difference we’re told now is that they will actually be enforced.
Even if these rules had been enforced they would have had little effect in stemming most of the current crisis. Ireland ran budget surpluses from 2002 to 2007 and by 2007 had a government debt level of 25pc of GDP. We were a poster boy for the rules set out in the Maastricht Treaty. Four years later we have a deficit that is persistently above 10pc of GDP and a debt level that has ballooned to more than 100pc of GDP and continues to rise.
Even if the rules from 1992 had been enforced, as the EU leaders now promise, we would still be in the mess we are in now.
The one addition to the original budgetary rules is that a country’s structural deficit must be no more than 0.5pc of GDP. The structural deficit takes the impact of the economic cycle into account and seeks to determine what the deficit would be if the economy was operating at full potential.
Estimating the structural deficit is not straightforward. The Department of Finance estimate that Ireland’s structural deficit will be 8.6pc of GDP in 2011. This is 17 times larger than the supposed absolute limit set down in the new agreement.
It is not clear why the 0.5pc structural deficit limit was included. It could just be to make the current rules different from those laid out in the Maastricht Treaty 20 years ago. We have always had these rules, it is just that they were not enforced.
The discussions that took place last weekend would have been useful if the countries were planning on launching a common currency 10 years from now and were trying to put together a stable framework in which the currency could operate. Of course, the euro was launched more than 10 years ago and any hope of stability has long since past.
We don’t need discussions of what a perfect currency union might look like. We need actions to save the imperfect one we have. And like all the summits that have gone before it, this was absent.
The problem in the eurozone is that countries have too much debt and are having significant difficulty accessing adequate funding from bond markets. Greece, Ireland, and Portugal have already been ejected from these markets with Italy, Spain and possible Belgium not far behind.
The countries of the eurozone do not have a credible lender of last resort. Improved fiscal rules and deficit reductions are all well and good but eurozone countries cannot finance the debt and deficits they have now.
It would be great if all eurozone countries had structural deficits of less than 0.5pc of GDP and government debts of less than 60pc of GDP. Italian government debt has been above 100% of GDP since the mid-1980s and has never had a structural deficit of less 0.5pc of GDP.
The rules agreed over the weekend will not solve the eurozone debt crisis but they might be another painfully slow step towards finally seeing a full resolution of the crisis. The European Central Bank has the unlimited capacity to fund the debt and deficits of eurozone countries.
The problem, of course, is that if countries have access to unlimited funding there is little or no incentive for fiscal discipline and we move from a problem of too much debt to a likely problem of too much inflation. The steps taken at this summit are an attempt to put a legal limit on the amount of deficit spending that countries can do.
It is possible, though no one at EU or ECB level would admit it, that if the framework agreed last week became legally binding and could be enforced somehow that the rules of the ECB would be re-interpreted to allow the central bank to fund governments as is the case with central banks the world over.
The EU may be planning to unleash some of the power of the ECB but doesn’t want to give member countries the equivalent of a credit card with no spending limit. Some proposals include the ECB ‘printing’ money and providing funds for the IMF to lend to governments or perhaps even giving the money to eurozone banks to lend to their countries. This would involve a significant relaxing of the ECB’s controlled role in the crisis to date.
However, the crisis is far too advanced and moving far too fast for this to be effective. Ireland will not decide until March if a referendum is needed because of these rule changes. Getting to the stage where the proposal is just adopted could take more than a year. Getting to the stage where the proposals are actually implemented will take even longer.
Yet again it is likely that the economics of the crisis will overtake the politics of it. This crisis can be solved with either a writedown of debts or an ECB lending facility for governments. Fiscal discipline is useful but we need to address the immediate problems first.
Expect more emergency summits in the New Year.
Seamus Coffey is a lecturer in economics at UCC and a blogger at http://economic-incentives.blogspot.com