submission to the EU affairs committee about the fiscal treaty

I would like to submit the following in response to your appeal for submissions on the EU fiscal treaty.

Broadly I welcome the treaty itself, but I am extremely sceptical it will prevent future crises and am concerned it will give a false sense of security from the very serious problems which remain in the Eurozone. These problems are I believe unsolvable unless we either leave the Euro or agree to much deeper and more unpalatable common reforms.

Firstly, a body of rules on public debt and deficits is a good idea for each individual Member State (MS). Therefore, as a framework agreement for each MS to implement such rules, the new treaty is I believe a good thing for the Union as a whole. Having sustainable public finances is unarguably a good thing.

However, the calculation of structural deficits is something less than a science, and fiscal rules proscribed by an international treaty are unnervingly inflexible. In cases of extreme adjustment, we will be dependent on our partners to allow us to exercise fiscal room for manoeuvre. I do not doubt that it will be possible to secure such consent if necessary, but it is nonetheless a power over our budget that should not be taken lightly. Implementing this treaty will pose challenges for all MSs -including those who currently enjoy benign conditions. There will undoubtedly be moments when we regret such a significant commitment and even bend the rules for expediency -but in the long run it is a good agenda.

My main problem with the treaty is that I believe it will not fix the much deeper problems of a common currency. I believe this treaty is the result of an incomplete interpretation of the source of the crisis and is addressed to some of the symptoms of the problem rather than the problem itself. It is a stricter form of the ineffective Stability and Growth Pact, which was never implemented, but which in any case would not have averted the crisis that has recently unfolded.

Without embarking on the huge task of summarising the crisis, let me make a few key observations about the crisis before examining how this treaty is likely to impact on future such crises.

This crisis was primarily the result of having a single monetary policy across a diverse union. In every MS, monetary policy was either too tight or too loose. In central Europe, where a decade of sclerotic growth prevailed in recent years, monetary policy was too tight and did not assist in generating activity. However, the problem was far more obvious in the less populated periphery countries, where an overly loose monetary policy led to a binge of debt. In Greece and Italy, this binge was primarily in the public sphere. Taxation collection slid as expenditure rose. The State had access to cheap money and used it. In Ireland and Spain, the overly loose monetary policy fed into private demand and especially construction loans.

Though these problems were different, it is important to recognise that they stem from the same problem of inappropriate monetary policy in individual MSs. The sluggish countries were reducing the capital available to themselves when they needed it most, and instead lending it to the countries that needed to reign in their borrowing -in effect the system made everyone's problems worse. This was predicted by economists long before the currency came into being and it seems their models have been tragically accurate.

As the crisis broke, credit dried up and in Greece this resulted in a crisis in the State finances. In Ireland it led to a crisis in the banks and also amongst individual borrowers who had overborrowed on the strength of a property bubble.

So how does the fiscal treaty propose to fix the problem of a one size fits all monetary policy?

Quite simply it does not. It proposes to control public borrowing only. This will prevent a future Greece. But it will in turn spawn a series of Spains and (Saints preserve us!) a string of Irelands. The fiscal treaty ignores the problem of inappropriate common monetary policy and instead focuses on the symptom of this problem in selected countries -i.e. public largesse. Meanwhile, private lending and borrowing is to be merely monitored, without further restrictions. Indeed, capital restrictions would be anathema to EU law.

The notion that more disciplined countries will not succumb to cheap money in the future when their monetary policy is inappropriately loose is naive at best -Racist at worst. The narrative of the virtuous countries versus the unvirtuous does nothing to explain the crisis and even shames us all. In reality we are fooling ourselves and setting ourselves up for a cycle of boom and bust where private debt bubbles will occur in country after country.

The fiscal treaty cannot easily be extended to cover the private sphere. MSs may agree to limit their indebtedness, but in market economies, the State does not have any useful power to bind private individuals from borrowing from or lending to one another. They can only manipulate the overall level of money available to financiers -i.e. monetary policy. But monetary policy is of little use in the Eurozone, because the money made available to sluggish countries will immediately be lent to the booming countries, making their situation worse.

Therefore, (without trying to be intentionally stark and provocative), I believe the Eurozone has only 4 options:

-A boom and bust cycle where individual MSs all endure periodic collapses, austerity and reform. No country can resist the allure of cheap money and even the "virtuous" will succumb.
-A common budget, issuing common debt and spending without regard to MS borders.
-A move by MSs to a centrally planned communist economy where all financial transactions are controlled by the State and dictated by national economic conditions.
-A dissolution of the Eurozone and a return to free floating currencies.

Given such horrific options, I must confess I favour a controlled exit at the first available opportunity. I write this as a committed Europhile and a great believer in the European project as both an instrument of prosperity and of peace. However, the Euro is not a workable currency, and this treaty does nothing to address this. The Euro is in fact going to destroy European unity and this completely inadequate treaty only serves to highlight the incomprehension of European leaders of the problems that are built in to monetary union.

In summation, I commend the treaty, but nevertheless advocate a withdrawal from the common currency at the earliest opportunity. It is particularly difficult to reach this conclusion when I am aware of how much money and sacrifice Ireland has sunk into retaining Euro membership in recent years -but the alternatives are unthinkable.

Whatever advantages the currency brings (e.g. attracting international investments, reduced transaction fees) is entirely unjustified when you consider the costs of remaining part of it. Noone will want to invest in Ireland while its currency is as inherently unstable as it is now apparent the Euro is. Noone will have faith in a currency that is doomed to boom and bust. Exit is the only sensible strategy.
sincerely
Ger