The kernels of the crisis, bank debt and growth, are not in the treaty, writes Michael Taft
THERE are two forces driving the European crisis. The first is the continuing instability in the European banking system. The second is the spectre of low growth and stagnation. The fiscal treaty has nothing to say about the banking crisis and it will make the low-growth crisis even worse.
That is why the fiscal treaty is bad for Ireland and bad for Europe.
The fundamental flaw of the treaty is that it badly misdiagnoses the European “disease”. It mistakenly assumes the crisis started with state debt. Instead, the crisis was started by the private debt of badly regulated and profligate financial institutions — a situation we know all too well here.
Instead of addressing this crisis, the fiscal treaty takes us down the cul-de-sac of complex and convoluted measurements and targets which have nothing to do with the crisis. Take the structural deficit: This tries to measure what part of the deficit cannot be reduced through economic growth and, so, must be reduced through spending cuts and tax hikes.
This may seem simple enough but it is anything but. Structural deficits do not appear in the economy. They only appear in complex equations and sometimes these equations throw up bizarre results. For instance, during the speculative boom period, the EU claimed we didn’t have a structural deficit — in fact, we were in surplus, though we were living on bloated property-based tax revenue.
However, months later, it claimed we had a deficit all along, and a severe one at that. It is hardly prudent to base future budgetary policy on such unstable equations.
Even today, the absurdities continue. The EU, estimating our structural deficit, says the economy will be “overheating” by next year; that is, we are growing too fast. Even the Department of Finance couldn’t buy into this. They called these measurements “unrealistic”. And yet the Government wants us to enshrine these “unrealistic” measurements and targets in our constitution.
Still, if the fiscal treaty is passed, we will have to live with this. And what will it cost us? Currently, the Government estimates a structural deficit gap of between €5bn and €6bn in 2015. This is the part of the deficit which growth cannot reduce. We will be looking into considerably more austerity post-2015 to eliminate this gap.
The other main target contained in the fiscal treaty is reduction of overall debt by 1/20th of the difference between our current debt levels and 60% of GDP. Ordinarily, such debt reduction would not pose a problem to an economy that is benefiting from even modest growth rates, even with the Government running a deficit.
But what if sufficient growth is not forthcoming? Will states be required to cut back to fulfil the debt targets? If so, they may find themselves in the perverse situation whereby austerity measures reduce growth, thus increasing public debt. This is happening in Ireland: Over the past year, the Government has revised growth projections down and revised the level of debt up — and this was with even more austerity measures announced.
The second problem is the interaction between the structural deficit and debt-reduction rules. Over the long term, this will drive down debt to unsustainably low levels — about 20% of GDP. This could severely undermine a state’s ability to invest in technologies, and so limit their growth potential. It’s as if people would be required to buy a house out of current income rather than borrowing. That this eventuality was probably not foreseen by the treaty drafters indicates that this is an ad hoc project based on political expediency, not rational economics.
One does not need a crystal ball to see how all this will play out. These rules are being implemented today — through bailout programmes and EU regulations. What is the upshot? Spain is heading into a bailout; Ireland and Portugal are heading towards second bailouts; Greece is in catastrophic social meltdown; while Italy is falling back into prolonged recession.
The fiscal treaty will drive down growth just at the moment when nearly half of EU countries are in recession and others are on the edge.
Tackling the symptoms of the crisis could see the disease spread. The safest course is to reject the treaty, as a first step to addressing the real crisis with a growth, investment, and social equality pact — a pact that delivers for Ireland and for Europe. That would be a treaty worth supporting.
* Michael Taft is with the research office of the trade union Unite
© Irish Examiner Ltd. All rights reserved