John Bruton

Opinions & Ideas

Category: European Union (Page 2 of 2)

UK GOVERNMENT FIRST STEPS NOW

Now that the UK has voted to leave the EU, the first step has to be taken by the UK Government.

It must decide what sort of relationship it wants to have, trade wise, with the rest of the world.

At the moment, that is governed by agreements negotiated, for the UK, by the EU.

If the UK simply leaves the EU, all those agreements will  fall, as does UK membership of the World Trade Organisation(WTO). Agreements with dozens of non EU countries, will have to be negotiated again, at the same time as negotiating  with the EU. A lot of work.

Basically the UK government will have to choose choice between three options

  • Leave the EU and, like Norway, apply to join the European Economic Area (EEA),
  • Negotiate a new special trade agreement, like the agreement Canada or Switzerland has with the EU
  • Leave the EU without any trade agreement and apply, as a separate country, to join the WTO

The EEA option could be put in place quickly and would not disrupt trade all that much.

The EEA is a readymade model for external association by a non member with the EU. It could be taken down from the shelf, so to speak.  But, as an EEA member, the UK would still have to implement EU regulations and contribute to the EU budget. It would not allow curbs on EU immigration. The EEA option has been dismissed by “Leave“ campaigners, but it does involve leaving the EU, and  complies  with the literal terms of  the  referendum decision.

If the UK experiences severe balance of payments problems over the summer, the EEA option may become attractive. The UK already has a big balance of payments deficit anyway and capital inflows may be inhibited by the Leave vote. The EEA option would buy time, and would not preclude leaving altogether eventually.

The second option, a special trade deal, would be much more difficult.

It would require a detailed negotiation on every type of product or service sale between the UK and the 27 member countries of the EU, including across our border.

Such an agreement would take years to negotiate (probably 7 or 8 years), because it would be subject to domestic political constraints, and political blackmail attempts, in all EU countries, each of whom  would have to ratify it. If it proposed curbs on immigration from the EU, the EU countries affected  would make difficulties with other aspects of the deal, as a bargaining counter.

It is unlikely that a Trade Agreement would allow the UK to sell financial services into the EU. Indeed it would be in the interest of EU countries, that might hope to attract financial services, to make sure the UK got few concessions .

The third option…leaving the EU with no agreement… could come about, either because that was what the UK chose, or because the negotiations on a special trade deal broke down or were not ratified by one or two EU states.

It would require the application of the EU common external tariff to UK or Northern Irish products crossing the border into the Republic.

Average EU tariffs are around 4%, but on agricultural goods the mean tariff is 18%. The imposition of these tariffs is a key part of the Common Agricultural Policy, which protects the incomes of EU farmers. We would have no option but collect them at customs posts along our border. All forms of food manufacture and distribution within the two islands would be disrupted.

The disruption of the complex supply chain of the modern food industry would be dramatic and the knock on effects impossible to calculate.

A similar effect might be felt by the car parts industry, which is subject to tariffs, and is important to some parts of England.

Meanwhile the remaining 27 countries of the EU, and the EU institutions, will have a lot of thinking to do too.

They need to respond decisivly to the (false) claim that the EU is not democratic.

All EU legislation has to be passed by a democratically elected European Parliament, and also by a Council of Ministers who represent the democratically elected governments of the 28 EU countries.

The members of the European Commission must be approved by the democratically elected European Parliament.

But there is room to further  improve  EU democracy.

I  would make two suggestions ,

  • The President of the European Commission should be directly elected by the people of the EU in a two round election , at the same time as the European Parliament Elections every 5 years

2.)To create a closer link between National Parliaments and the EU, a minimum of nine national parliaments agreeing should be sufficient to require the Commission to put forward a proposal on a topic allowed by the EU Treaties . National Parliaments can already delay EU legislation, so they should be free to make positive proposals too.

That said, the EU should avoid over promising, and should not allow itself to be blamed for all the problems people face in their daily lives.

The EU is not an all powerful monolith that can solve the problems caused by technological change and globalisation. It is just a loose voluntary confederation of 28 countries, with no tax raising powers of its own. Nor is the EU responsible for debts mistakenly taken on by its members.

If the losers of globalisation and technological change are to be sheltered from misfortune, it is for the 27 states, not the EU itself, that has the taxing power to redistribute money from the winners from globalisation  to the losers.

The UK has not been particularly generous in this regard.  Its welfare system is modest, and its investment in productivity improvement has been poor.

In some respects, UK voters  have just mistakenly blamed  the EU. for the effects of the  omissions, and under performance, of successive UK governments.

THE OFFER TO DAVID CAMERON….IS IT REALLY A “REFORM”?

The-UK-and-EU-flags-010The concessions the UK is winning to encourage its citizens to vote to stay in the EU could make the EU even more complicated than it is.

They could slow down decision making still further, at the very time when problems are becoming more, not less, urgent. This would not be “Reform”. Yet David Cameron says he wants the keep the UK in what he calls a “reformed European Union” Already the UK is

  • exempt from joining the euro,
  • exempt from the common border rules of Schengen, and
  • does not have to take part in EU activities to combat crime(although it can opt into these on a pick and mix basis).

It is a semi detached member of the EU, which makes it harder for the UK to exercise leadership in the EU.

Now the UK is seeking, and may be granted at a Summit next Thursday, new concessions. These concessions are being sought because UK public opinion is convinced that the EU is undemocratic and should be curbed. They are convinced the only locus of true democracy for the UK is Westminster. The truth is that neither the EU, nor Westminster, is a perfect expression of democracy.

In Westminster a party can have an overall majority of the seats with only 37% of the vote.

In the EU, while the members of the European Parliament and the Council of Ministers, who make the decisions each have democratic mandate, the people of Europe have only a very indirect vote on who is to be the President of the European Commission. EU voters, unlike Westminster voters, do not have a sense that they can throw the EU government out of office. But, instead of focussing on how to make the EU level governance more democratic, UK negotiators have concentrated on enhancing the capacity of the 28 national parliaments to block EU law making.

Given that the UK is a global player, one would have expected it instead to focus on making global and EU wide governance more democratic, rather than slowing things down or simply repatriating powers to the national level.

NEW OBSTACLES TO EU LAWMAKING ARE NOT “REFORM”

As part of the package devised to respond to UK requests, EU rules are to be changed to allow 55% of national parliaments to apply to have an EU law blocked before it has been properly considered by the Council of Ministers and the European Parliament. This “Red Card” power is to be exercised within 12 weeks of the law having been presented at EU level.

This blockage is supposed to be grounded on a claim that the EU law breaches to principle of “subsidiarity”.

Subsidiarity is a philosophical concept, around which there can be so many differences of opinion, that it does not constrain this blocking mechanism being used for reasons of pure political opportunism. One could easily envisage an EU law, that had been introduced to open up the EU market for legal services, being opposed virulently by lawyers in every member state.

Or one could imagine an EU law, to open up the energy market across borders, being opposed by high cost producers in a number of states. As it is, the lawyers and the energy companies can, and do, already fight such laws in the European Commission before they are presented, and then in the Council of Ministers and the European Parliament while they are being debated, voted upon, and compromised in and between Parliament and Council.

Now, to allay UK worries, a new field of operation is being opened up for the lobbyists who want to stop an EU law…the 28 national parliaments of the EU.

EU lobbyists will now be tempted to open offices in the capitals of all member states, so that they can be ready to lobby on behalf of clients to persuade members of national parliaments to use of the Red Card to stop a future EU law a client might not like.

Parliamentary majorities can change and many EU countries are governed by coalitions or minority governments, so one could envisage EU lobbyists seeking to exploit domestic inter party rivalries, or domestic instability, to win support for the use of a Red Card by a national parliament. All national parliaments are equal in this system, so the 55% blocking vote could come from countries that represent only a small minority of the EU population. It is therefore surprising that the UK, which is a big country, is championing this mechanism.

It is surprising for another reason.

The UK is primarily an exporter of services rather than goods. It is in the area of services, rather than goods, that the EU Single market is furthest from completion.

Therefore services is an area where the EU will need to pass the most laws to sweep aside national restrictions on competition from other EU states.

As a services exporter, the UK would have much more to gain than to lose from EU Services liberalisation legislation. Yet it is the UK which seeking a red card that would make it easier for opponents of liberalisation to delay and block EU liberalisation legislation!

PREVENTING THE EURO ZONE ACTING QUICKLY IN A CRISIS IS NOT “REFORM”

Another proposed concession to the UK could also complicate EU decision making on economic and financial matters.

Here the UK concern the is about rules being made to govern the euro, which might inhibit UK financial operators making full use of the euro zone market. On the other hand, as we have learned from the crisis, banking problems in one jurisdiction infect others very easily. UK and US banks were exposed by the Greek crisis and did not complain when EU action protected their interests!

The EU authorities may have to act very quickly if there is a new banking crisis. The EU banking union is not complete, especially as far as deposit insurance is concerned.

Yet to satisfy the UK, it is now proposed that a member state, like the UK that is not in the euro zone, be free to appeal a proposed EU law, which is proposed to safeguard the euro, to the European Council (where it may be able to veto it)

This is despite the fact that it is also proposed, in the special package for the UK,

  • that non euro members are to be freed of any financial obligation for euro area costs, and that,
  • in non euro zone countries, supervision of banks be a “matter for their own authorities” according to the text.

The proposed procedure would allow a non euro member, like the UK, to delay an EU law that is needed, in the view of the states that are in the euro, to safeguard their currency or the ensure the solvency and proper supervision of their banks, in the interests of customers and depositors.

It is unclear what happens when the appeal is brought to the European Council.

The European Council usually decides issues by unanimity, so one could envisage an urgent EU law to safeguard the euro or the euro zone economy being vetoed there by the UK, which was not even in the euro.

This is giving the UK power without responsibility.

The proposal for the UK does say that “member states whose currency is not the euro shall not impede the implementation of legal acts linked to the functioning of the euro area and shall refrain from measures which could jeopardise the attainment of the objectives of the economic and monetary union”.

But these are all matters of judgement on which it may not be easy to find unanimity, especially when time is short, and national interests collide.

BRITAIN SHOULD RAISE ITS SIGHTS…THE ONLY WAY TO WIN THE REFERENDUM

For the past two millennia, Britain has had a vital interest in the peace and prosperity of continental Europe.

It has gone to war many times to preserve it.

English is the language of EU governance. The EU Single Market is a modern application of the ideas of Adam Smith.

Two hundred years ago, when European states were much less interdependent than today and was recovering from the Napoleonic Wars, the then UK Foreign Secretary, Lord Castlereagh, persuaded the European powers to make, in his words, “a systematic pledge of preserving concert among the leading powers and a refuge under which all minor states may look to find their security”.

While his views on Ireland were mistaken, Castlereagh’s views on Europe were not. Rather than seeking a series of further exemptions, and so called “reforms” that will slow further an already complex EU lawmaking system, David Cameron should follow Castlereagh’s example and set out his country’s own comprehensive vision for the peace and prosperity of Europe.

Then he might give himself a chance of winning the Referendum he has chosen to have

POPULISM REACHES ITS LIMITS

Alexis Tsipras
Because of its Classical past as the founder of democracy, Greece was treated more tolerantly, than other countries would have been, when, during the nineteenth century, it defaulted several times on its commercial creditors.

That history created bad habits of mind. Now its creditors are the taxpayers of other countries, who are less tolerant, and less conscious of their intellectual debt to Plato and Socrates.

The present Greek debacle is the result of a clash of political cultures.

On the one hand is the culture of the European Union, where every decision has to be mediated through complex institutions representing 28 different countries, each with its own political culture, and then often has to win the assent of the European Parliament and of an independent European Central Bank. 

Theatrical gestures and moments of brilliant eloquence count for little in this world. Building a good track record, with good civil service staff work to back it up, is what counts in the EU political culture.

EU bailout decisions also have to be approved by the IMF, a global body, most of whose members and clients are far poorer than the Greeks. This creates an additional layer of interests which Greece must try to satisfy, as well as its EU partners.

In this setting, credibility and patience are vital to success. The new Greek government did not have patience, and soon it lost credibility as well.

In stark contrast with what was needed, it seems to me that the Greek Government is made up of people who come from a revolutionary tradition, where it believed that progress will come from a harsh rupture with the past, and whose proponents envisage a nationalist or socialist utopia, once that rupture is complete.

The Greek government are also people who have little or no previous experience of government, and who have thrived politically by agitating against the existing order, without the necessity of explaining how things would work after they had obtained power, and they had to survive and govern in the complex interconnected reality, that is the global economy of today.

That the Greek electorate would elect such people to office is explained by the desperation in to which they had been led by the irresponsible policies pursued by successive Greek governments since the 1980’s, who tried to win the votes of Greeks by promising them a standard of living that was not matched by their productive capacity, and by the mistaken decision to take Greece into the euro before the results of these bad policies had been properly rectified.

The problem is that the activities of the new government made things much worse than they were when they took office.

By creating doubt about whether they would honour the debts incurred by their predecessors, the new government created a crisis of confidence, and this loss of confidence led to a suspension of normal commercial activity. By looking for debt relief, before reforms were implemented they put the cart before the horse.

The underlying problem of Greece is a lack of productivity and export potential, but the Greek government, and to a great extent the EU authorities too, continue to ignore this. Greece’s productivity problem will take years to solve, not least because Greece is an elderly society. The structural reforms urged by the EU will help, because they will clear the clogged arteries of the Greek economy and allow talent to be reallocated to where it can do something productive. But the ageing of Greek society will remain an intractable problem.

As a result of the drama generated by their new Government, Greeks, instead of focussing on ways to invest to make more money, became in recent months obsessed instead with protecting what they already had. Whereas the economy was on a path towards modest growth, when the old government left office, it quickly plunged back into recession as money was withdrawn from the Greek banks, thereby further weakening Greece’s ability to meet its ongoing expenses, and to pay its debts as they fell due.

The timing of the Referendum, AFTER Greece has already run out of money, and on a proposal that has already been withdrawn, could not be worse. It compounds the panic and uncertainty. It is probably in breach of the Greek constitution. Apparently the Greek constitution does not allow referenda on fiscal issues, and the bailout offer contains many elements that are fiscal.

If ever there was a case study that shows how important it is to have political leaders who understand and face up to their responsibilities, and who deal with the world as it is rather than as they might wish it to be, it is to be found in Greece today. The lessons for Ireland are too obvious to require to be spelt out.

I wonder how Paul Krugman and others, who were so free with their advice to the Greeks in the early months of the crisis, are advising the Greeks to vote in the referendum on the 5 July.

CLUB DE MADRID IN FLORENCE…

A SPEECH BY ROMANO PRODI

I am attending a meeting of the Club de Madrid, an organisation of former heads of government working to promote democracy, in Florence this week. The question being addresses is whether, after the 1990’s when democracy was spreading widely in the wake of the fall of Communism, democracy and human rights are now in a phase of relative decline again.

The opening keynote speech was made by Romano Prodi, former Italian Prime Minister and European Commission President, who gave an excellent speech.

He reminded us that having a market economy, as China does, does not guarantee democratic government. The dispersal of power, which is essential for a market economy, can help democracy, but it does not assure it. The Chinese” model” could become a challenge to democracy.

He worried that, if democratic governments fail to deliver acceptable economic results, democracy itself will come to be questioned. 

This is a particular risk in the European Union, where

   +  the ageing of societies,
   +  the absence of structural reforms, and
   +  the rigidities caused by the incompleteness of the euro zone,


are contributing to slow growth and high unemployment, especially among young people.

In some countries, democracy suffers from perpetual electioneering, and from too many veto points which prevent necessary changes being implemented.  Short term thinking predominates as a result.

Romano now teaches in universities in China, and he remarked that, whereas ten years ago Chinese were constantly asking questions about the European Union, they no longer do so. Their questions focus now on the lesson to be learned from Thucdydies, the ancient Greek historian, who wrote about the risks of war when a rising power meets an established one (Sparta and Athens). Clearly the Chinese see such risks as between themselves and the US.

A REPORT ON THE STATE OF DEMOCRACY IN EUROPE

We have before us a series of reports on the state of democracy and human rights in different parts of the world. The reports were prepared with the help of the Bertelsman Foundation. The scope of the study includes 

+  the fairness and openness of elections,
+  the rule of law and separation of powers,
+  internal democracy in parties,
+  strategic thinking within the governmental system,
+  efficient use of human and material resources
+  anti discrimination laws


Generally speaking, the Nordic countries came out best. There were some problems in southern Europe. Among post Communist countries, the Baltic states and Poland had the best record. The situation was somewhat more difficult in the Balkan area.

 WORRYING TRENDS IN HUNGARY…..CONCENTRATION OF POWERS

The countries to come in for the most severe criticism were Hungary, and to a lesser degree Turkey. The findings in regard to Hungary are the most alarming, given that it is a full member of the EU. 
In respect of Hungary, the report says

“The government  has tried to monopolise political power by taking control of a number of independent agencies and supervisory bodies and had undermined the judiciary’s independence”

It adds that Hungary’s new media laws

“strengthened government control over the media by vesting a Media Council, exclusively composed of persons affiliated with the Government party, with control of media content  and the granting of broadcasting licences”

These matters deserve the attention from the European Union institutions.

THE GROWTH OF SUPPORT FOR POPULIST PARTIES….

UNDERSTANDING THE NEED FOR RESPECT, AND FOR RECIPROCITY, ARE THE KEYS TO THE FUTURE OF THE EUROPEAN UNION.

What have the following in common?

+ The Scottish 45% YES to break up the UK….+ The Growth of National Front in France….+ English anti EU sentiment and support for UKIP…. + The strength of Tea Party  and the polarisation of politics in the  USA and + The growing support for anti immigrant parties in Sweden, Denmark, and the Netherlands.


They have this in common. All these parties want to withdraw from some international commitment or other, and shut the doors of their nation to outside influences. 

What support for these parties shows is that an introverted and recessive Nationalism is on the rise again. This is a reaction against globalisation by those who have benefitted less from it than others did. 

It should be noted that all have benefitted from globalisation through cheaper food, clothes, and cheaper communications. But some have benefitted much more than others, and the “others” are expressing their disgruntlement through votes for these populist parties.

These parties want a repatriation of powers to the national level, and even complete withdrawal from international bodies like the WTO, the European Union, and the European Convention on Human Rights.

People supporting these parties say they do not understand how Brussels works, or how Westminster or Washington works. But do they really understand any better how their local council works ? 

This is why I am unconvinced that concession of their literal demands would actually remove the discontents that lie behind support for these parties. 

For example, I am not convinced that an elaborate system of federalism within UK, or UK withdrawal from the EU, would actually assuage the anger being expressed through UKIP votes. The experience of post Franco regional devolution in Spain is not completely reassuring.

In Scotland, the younger and the poorer sections of population   were the most alienated, and voted most strongly for Scottish independence . This is despite the fact that public spending per head, on which poorer people depend more, is already higher in Scotland than it is in England.

It is £10,152 per head in Scotland, as against £ 8,529 in England. On those figures, complete fiscal would worsen the position of poorer Scots.

A SENSE OF BEING RESPECTED IS WHAT IS MISSING

I believe these vote reflect a sense of not being listened to, of not being respected, than they do a demand for particular constitutional or institutional changes. 

Do Scots feel respected, and listened to, in UK? 

Do working class voters of the National Front, UKIP, and the  Tea Party voters feel respected by metropolitan elites?

I fear the answer in “No” in all cases

FEAR OF THE FUTURE

Fear of what may happen in the future drives people in the direction of populist solutions, and parties.
States have made health promises and pension promises that will become unaffordable, as the proportion of the population that is elderly grows. Meanwhile, many private  pension schemes are underfunded.

Another pervasive fear is that of redundancy in mid life. In such a circumstance, it is difficult to know what new skills to go for, and it is equally difficult to move to another city to find work, after a certain age.

ANTI IMMIGRANT SENTIMENT

These fears feed anti immigrant sentiment.
Immigration disturbs bucolic image some people have of their ideal national environment….forgetting that, if they actually lived in their ideal environment, they would probably find claustrophobic and boring.

There IS  also competition for low skilled jobs, and immigration DOES drive some wage rates down
But automation and labour saving devices are devaluing all forms of low skilled work anyway, and probably are more important drivers of income inequality,

INEQUALITY OF INCOMES

The growth in inequality in incomes is also a factor in the growth in support for populist parties.

Inequality is driven by many factors.

It is driven by technology . Technology replaces low skilled workers, while increasing the rewards of the higher skilled people, or insiders, who control the technology.
One should not ignore the importance of celebrity in causing inequality. Celebrity brings disproportionate increases in relative income. Celebrity footballers, and celebrity CEO’s, represent the same phenomenon. A firm’s stock price is driven partly by the reputation of its CEO and that means a well known CEO can command a higher salary package.
Inequality is also driven by access to financial leverage, and assets that can be used for leverage. Thus high financial sector incomes evoke particular concern.
These are all issues that need to be dealt with by national governments, through the tax system.

But they should not be used to justify turning away from the EU or from the benefits that globalisation has brought.

THE MEANING OF NATIONAL IDENTITY 

We are not going back to a world of Empires in which Europeans, or people of European ancestry, could make the rules of the game to suit themselves.
We can perhaps limit the pace of immigration, but we cannot stop it.
So we need updated civic education of ourselves, and of immigrants to our shores, on questions like

“What does it mean to be British?”
“Can one be British, Scottish and European all at the same time?”
“What does it mean to the Irish and European, but of African ancestry?”
” What are the values that underlie these statements?” 

RECIPROCITY

We also need to work out the practical implications of reciprocity as a principle of international relations.

Let me illustrate this by reference to debates now taking place in the UK.

If EU citizens immigrating to UK to work are to have restricted access to state benefits, how might that affect the entitlement to health service of the 2m UK citizens living in other EU countries? 

If the UK want access to an EU Single market to sell its goods and services does that means accepting  common EU standards for those goods and services….even fiddling rules on thing that seem  not to matter…unless we all recognise everyone else’s standards regardless which could be bad for consumers?

In particular, the UK wants a single EU market for services…..but services are provided by people, and these people may need to travel to another country to provide those services….which gets you back into the immigration debate 
If Britain wants a veto on certain EU laws, rather than have them decided by majority, 27 other countries will also have to get that veto too.

If , as some Conservatives propose, the UK withdraws from the European Convention on Human Rights, what effect will that have on the hard won agreement on policing in Northern Ireland, which depends on access for police complainants to the EHCR? Is the plan just to take England out of the EHCR, or to take Northern Ireland out as well?

DEMOCRACY IS THE KEY TO RESPECT

If the EU is to survive, EU citizens need a sense that they can cast a vote to change the men or women at the top in the EU, in the same way as they can change the people at the top in Dail Eireann, in Westminster, in Birmingham city council, or in their local tennis club.

It is not that citizens want to get into the details….but they do want a vote on the EU’s direction of travel

Globalisation has been taking key decisions above the level of individual states for a long time. That is nothing new. But the time has come to make it more democratic.

The International Telegraph Union dates back to 1865

The International Court in the Hague dates back to 1945

Traditionally the  rules, governing bodies like these,  were negotiated in private in the form of inter state Treaties, between diplomats, and later interpreted by judges. 
Elected people were often only involved at end of process in saying a simple YES or No to result, by ratifying the Treaty or not. 

The EU is different.

In the EU, politicians in the Commission initiate laws, and politicians in the European Parliament and the Council decide if these laws will come into effect.

In this sense, the EU is MORE democratic than virtually all other international organisations in the world….but it’s not democratic ENOUGH

I believe the direct election of the President of the European Commission by the 500 million people of the EU, not simply by the 28 heads of EU Governments, is needed. 

Only in that way will we  create a well informed democratic EU public opinion. That would be the best answer of all to the populists.

WHY EUROPE NEEDS TO GET ITS ACT TOGETHER

Gorbachev’s advisor Alexander Arbatov, said , in 1989 at the time of the collapse of the Soviet Union, to a western diplomat

“we have done you the worst of services, we have deprived you of an enemy”

Since then, the lack of perceived external threat has led to weak economic management in Europe, to an unnecessary war in Iraq,  to increasing debt,  to weakened military strength, and to the making of insincere promises that could not be fulfilled when to going got tough.

Now, that period is over. 

We now see, thanks in part to ill considered promises of eventual NATO membership to Ukraine and Georgia, that those countries have suffered pre emptive annexations of parts of their territory by force by Russia. The UN Charter and the Helsinki accords on territorial integrity of states have been binned.

In Eastern Ukraine we are now witnessing I recently heard a US general describe as “a new kind of warfare”.

Meanwhile, the growing strength of China’s navy distracts US from Europe, and European and US interests are diverging because the US is  becoming energy self sufficient, whereas Europe is not.

And productivity in Europe is lagging.

According to the OECD, EU labour productivity is  growing at 0.6% pa, while productivity in the rest of the OECD is growing at  1.2% a year.

CONCLUSION

Rather than contemplating separatism, Europeans should be thinking about our precarious position in the 21st century world, and uniting to do what we can do about it.


WHAT WOULD HAPPEN IF THE EU BROKE UP?

I have attended a number of conferences in the past few weeks where the future of the European Union has been discussed. Where previously the EU’s continuance was complacently taken for granted, now there is much more uncertainty, but also much more interest.
The European Union has been a remarkably successful institution building project. It is the first ever voluntary coming together of sovereign states, pooling some of their sovereignty, so that they could do more together, than they could separately.
Almost every other political unification or state building in history has involved the use of force, including the creation of the UK and the maintenance of the USA. The EU came together peacefully and voluntarily.
Some might argue that the EU was necessary only in order to cement a post war reconciliation of Germany and France and that, now that that is achieved, it has done its job and needs no further development.
This is wrong for two reasons.
WHY THE EU IS STILL AN ASSET
1 . AN ASSURANCE OF MUTUAL SECURITY,
 Firstly, the fact that there is a queue of states still lining up to join the EU shows that the EU still provides a necessary political and economic umbrella under which reconciliation and mutual security between states can be  assured in the twenty first century.
This was why the Baltic states, Poland and other central European states joined, and it is the reason several Balkan states, and even Georgia and Ukraine might like to do so. It is also the reason why Greece, much to the surprise of many, has favoured Turkish membership. While the United States of America is remarkably successful in many ways, there is no queue of other American states lining up to join. Even Puerto Rico has not done so after more than 100 years of Washington rule
2. A WAY TO MANAGE GLOBALISATION DEMOCRATICALLY
Secondly, the EU is the most advanced effort in the world providing a measure of democratic supervision into globalisation. Unlike other efforts to supervise globalisation, like the United Nations and the World Trade Organisation, the EU has a directly elected Parliament which co legislates for the EU alongside the 27 Governments, who often decide issues by majority. Other international organisations operate on a purely intergovernmental basis, which means that there has to be unanimity to get a decision, and democratic involvement only arises when a deal already negotiated in private, has to be ratified in national parliament  without possibility of further negotiation or amendment.
As a result, other organisations, like and the WTO and the UN, can do much less, and have to  do much more of what they do behind closed doors, than is the case with the EU.
My view is that the EU provides a unique model for democratic rule making, at supra national level, something which will become more, not less, necessary as we proceed into the 21st century.
  Indeed the failure of the world to deal with climate change is a good example of the weaknesses of present intergovernmental models of global governance. If the different regions of the world had Unions, like the EU, which could negotiate seriously, and with genuine political legitimacy, as the EU can, the failures of Copenhagen and other climate change summits would not have happened.
If the EU were to break up, either because of the collapse of the euro or because a major country like the UK feels it has to exercise its right to leave the EU, and either event were to set off a breakdown of the trust that keeps the EU itself together, we would have lost a unique instrument for security building in Europe, and for problem solving in the wider world.
I would now like to analyse those two potentially existential threats to the EU, the euro crisis, and the UKs possible desire to leave.
Of these, a  break up  the euro is undoubtedly  by far the  more serious existential threat to the EU, because the scale of the economic losses is potentially much greater, and the  means of controlling  those losses, are much less.
THE EURO CRISIS IS NOT SOLVED
The euro crisis has become slightly less acute in recent weeks. The announcement of a new bond buying policy by the European Central Bank has calmed the markets. But there is no doubt that the markets will test the ECB’s will power at some stage.
Meanwhile the link between the solvency of European banks and the solvency of European states has not been removed.
 A default by any EU state would wreck the banks of that state, because each state’s banks tend to be big  purchasers of the bonds of that state.
Similarly a potential collapse of a bank in a state would force that state to inject capital into banks, if it did not want a run on banks generally to take place, and contagion to other countries. The  confidence loss caused by a major bank getting into difficulty could lead to a dramatic collapse in state revenues, leaving it with a much increased budget deficit, at the very time it was also having to find the money to recapitalize the bank.
FOUR THINGS THAT MUST BE DONE TO SOLVE IT
If these problems are to be resolved, four things will have to happen, more or less at the same time.
1. Greek Government debt will have to be forgiven.
2. The ESM will have to be seen to be big enough to stand behind Spain and other countries that might get into difficulty, on a contingency basis,
3. The new mechanisms to supervise, and if necessary rationalize, Europe’s banks will have to be put in place.
4. The already agreed reforms to reduce deficits, and to promote growth by opening up the job and service markets to competition will have to be demonstrated to be being fully implemented, in letter and spirit, to show creditors that, if one forgives debt or creates enlarged the ESM, one is not throwing good money after bad.
At the moment, the Greek debt issue is not being tackled, and seems to have been postponed until after the German election in September. The delay may not be the worst thing in the world, if it allows time for Greek reforms to begin to establish credibility. It also allows time to educate public opinion in creditor countries like Germany, and in countries sitting complacently on the sidelines, of the true consequences for themselves of a euro break up. Greece also need immediate help to finance itself to the end of 2013, and that bridging finance cannot await elections in Germany or anywhere else.
The EU has already enacted a raft of legislation, including the Fiscal Compact Treaty, to ensure that countries reduce their deficits, and liberalise their labour and service markets. . One of the reasons growth potential has been low in Greece, Italy, and Spain is lack of competition or flexibility in key sectors
But Germany is not yet satisfied. It wants to have an EU Commissioner with the power to veto state budgets, and enforceable contracts on reforms between states and the EU.  But not enough attention is being paid to the fact that Germany, France and other core countries could also be doing a lot more themselves, to open up their own digital, financial, energy, retail and professional service markets. While Germany has set a good example in labour market and pension reform,  there are other reforms it could initiate, that would help other EU countries to sell more goods and services into the German market, and thereby trade their way out of their problems.
There is understandable political resistance in Germany to any further debt forgiveness for Greece. But debt forgiveness within the euro is one thing. Greek exit from the euro is an entirely different matter. It would be far more dangerous, and that needs to be explained to German public opinion.
WHAT WOULD HAPPEN IF THE EURO ZONE BROKE UP?
Even a disorderly default by a country within the euro, no matter how severe its consequences for its own people and for its creditors, would have far less severe consequences for the euro, and for the EU itself, than an exit of a country from the euro would have.
I have heard a view from some Northern Europeans that an orderly exit of Greece from the euro could be contemplated, if it was accompanied by building up a huge fund, much bigger than the existing ESM, to stand behind all the other euro area states, so as to prevent a Greek exit leading to a loss of confidence in the financial position of the rest of the euro zone.
I believe this view, that Greek exit from the euro can be managed, is profoundly mistaken.
The whole edifice of the EU rests on law. The EU has no police force to enforce its will. It relies on member states freely respecting the interpretation of EU law by the European Court of Justice, and implementing the Court’s decision, however unpleasant that may be. The exit of a country from the euro is, quite simply, a breach of their Treaty obligations, and treaty obligations have the force of law.
The euro was established on the basis that it was irreversible. A Greek exit, particularly if it was condoned or encouraged by other members, would say loudly that the euro is not irreversible.
That would lead to constant speculation in the markets as to who would be next. And as speculation increased, so too would the size of the funds or guarantees needed to check it, increase. That in turn would then lead heightened risk that some of creditor countries, who would have to provide these funds and guarantees, might decide that they themselves should exit the euro, and re-establish their own currencies. That would be the end of the euro.
Breakups of currency unions have happened before, in Austro Hungary after the First World War, and in Eastern Europe in the 1990s when the rouble zone broke up. As described in a recent article by Anders Aslund of the Peterson Institute of International Economics, the consequences of this were disastrous.
A  SCENARIO THAT MIGHT LEAD TO THE END OF THE EU ITSELF
New currencies would have to be established. The relative value of these currencies would be unknown and unknowable. Some would lose value very quickly and others would shoot up in value.
Exports would become dramatically uncompetitive in some cases, and in others they would become  so cheap that there would be  accusations of dumping, currency manipulation, and calls for  immediate reintroduction of  import duties to level the playing field. Such duties, if imposed, would  end the Single Market.  And that would be tantamount to the break up of the European Union itself. Open markets, the assumption on which Ireland built it entire economy over the last 50 years, would be gone.
In some countries the banking system would break down, and people would have no access to credit for even the most basic transactions.
In others, people would cease to trust the value of their own money, and money, after all, is based on a promise and if people can no longer trust the states standing behind the promise that underlies their money, the basis for money itself is gone.
This is not fiction. It is what happened when the rouble zone broke up in the 1990s and explains why incomes fell by 50% in the former rouble zone countries. And the exporter nations within the rouble zone, like the Russian Federation, suffered just as much hardship as the importer nations, like Latvia and Estonia.
The political stresses that this scenario for the 500 million people of the EU, and their Governments, would be such that trust between European nations would easily break down completely.
We see signs of that happening already, but it is being held in check by the hope that problems can still be resolved on a collective basis. A break up of the euro would show that that was impossible to resolve matters on a collective basis, and it would then be a case of every nation for itself, with particularly severe consequences for smaller countries, like Ireland.
…………AND MEANWHILE IN THE UNITED KINGDOM
As if Europe did not have enough problems, one important EU country, the United Kingdom of Great Britain and Northern Ireland, is preparing to renegotiate the terms of its own membership of the EU, and hold a referendum on the outcome, which would potentially decide whether the UK would stay in the EU or leave.
The first thing to say is that the UK is entirely free to do this. Unlike other Unions, like the United States or the United Kingdom itself, the European Union is a Union which states are free to leave, so long as they fulfil their normal obligations under international law, which arise when any country withdraws from any international treaty.
The UK has been an uneasy member of the EU from the outset. While Churchill envisaged a United States of Europe, he did not envisage the UK, which still had a global Empire at the time, being part of it. The UK did not attend the 1955 conference in Messina which led to the Treaty of Rome. When it eventually joined the Common Market, a decision endorsed by a referendum, the idea was sold to the electorate as an economic arrangement, whereas even the most cursory reading of the Treaty of Rome would have shown it to be much more than that.
A THREAT TO VETO THE EU BUDGET
The United Kingdom is now threatening to veto the entire EU budget,  something it is legally entitled to do, unless there is an absolute freeze on the size of the budget. The difficulty with this stance is not legal, it is political.
 The EU Single market, which guarantees free movement of people, goods and services, was created as a political deal.
 Weaker economies opened up their markets to stronger ones, and removed protection from local businesses, on the basis of a promise that they would qualify for structural funds to modernise their economies. These funds are what the EU budget provides. (Some of the EU budget also goes on agriculture, but that has fallen from almost 80% of the total originally, to only 30% today.)
The political difficulty with the UK stance is that of fairness.
In the past, when countries like Ireland, Spain, Greece, Portugal, and even the UK itself, joined the EU, we all qualified for very substantial EU structural funds, in the form of aid for agricultural modernisation, general infrastructure, training, communications etc.
Now, when the EU has taken in 12 central European countries who are almost all relatively far poorer by comparison with the rest of the EU,  than we were when we  joined, these 12 are to be told, if the freeze the UK  wants is to go into effect, that they are not to get even a fraction of the help Ireland, Spain, regions of the UK and others qualified for as of right after we joined. This is causing resentment.
I heard an Estonian Minister complain recently that, under the existing EU budget which is already an unfair compromise, his farmers have to compete in the same EU market with west European farmers who are getting three times the subsidies. Unless there are to be drastic cuts, this sort of anomaly can only be put right by an increase in the EU budget.
The problem is that the UK Government has made the size of the budget a red line issue without getting into any informed debate about what the money is actually spent on, or about what sort of EU budget is necessary to ensure that the  EU Single Market, to which the UK itself is very much attached, works fairly and is preserved.
The UK wants access to the single market, but is not prepared to pay any entry fee.
AND A DEMAND TO RENEGOTIATE THE ENTIRE BASIS OF UK MEMBERSHIP OF THE EU
The same problem arises in the renegotiation of the terms of UK membership for which the current  UK Government wants. In preparation for this renegotiation, the UK Government is now doing a comprehensive audit of all EU laws, to identify areas of activity that could be taken back from the EU to be administered exclusively under UK law instead. There may be some good ideas emerging from this, on which all other members could agree, but there may also be a lot of problems.
The difficulty is that the UK wants to take back, yet to be specified, powers, but also to retain full and unfettered access for all its goods and service exports to the EU Single market. 50% of UK exports go to the euro zone, whereas only 15% if euro zone exports go to the UK, so this is important to the UK.
The difficulty is that the EU Single Market, like any market, is a product of common rules, regulations and conventions. A market is a political construct. Without common rules or understandings nobody could rely on what they were buying.
That is why, for example, there have to be common EU quality standards to construct a common EU market. Otherwise one country could impose peculiar quality standards, designed to exclude competitors from its market and to enable its own producers to make monopoly profits at the expense of its consumers. Any rulemaking power that could be abused in this way, cannot be handed back to national level without endangering the Single Market. That is the problem that the proposed UK renegotiation of  its EU membership terms will encounter.
And the competition in any market also has to be fair, and someone has to regulate that. If competitors have different environmental, or product liability standards, or if some firms are operating monopolies or cartels, the competition will not be fair. These matters cannot be handed back to be decided by national authorities without also endangering the Single Market.
 If the UK were to draw up a list of EU rules it would like to make in Westminster rather than Brussels, the other 26 could also do the same, but they might come up with a very different list. The process could become bogged down in serial  reopening of compromises, made years ago, on issues that have little relevance to the urgent existential threat  the EU faces today.
One gets the impression that many in the UK do not really care about that.
 The EU is still regarded by many in the UK as a foreign country, not a Union of which the UK itself has been an integral part for the past 40 years. Membership of the EU is seen as a convenience rather than as a commitment. If the price of satisfying UK voters is to cause more problems for the “foreigners”, in “Europe”, that is not seen by some UK political leaders as such a bad thing.
The difficulty is that the “foreigners” in Europe may not see it like that.
With so many genuinely urgent things to do, such as safeguarding the very existence of the EU itself, the other 26 member states may just not be inclined to devote time to a painstaking case by case analysis of a series of requests for new UK opt outs from some bits of some rulemaking authority, with UK opt ins to others, and to a judicious analysis of whether each one of these decisions might affect the integrity of the Single Market, either now or at some time in the future.
 And the European Court of Justice would certainly have difficulty interpreting the consistency of a special EU menu for one country with the basic freedoms for all on which the EU is based.
 There is also the old question of whether UK Ministers and MEPs should continue to have voting rights on things they are opting out of. As it is, one has to say that it is distinctly odd that the present Chairman of the Committee of the European Parliament that deals with euro currency matters, represents a constituency in the UK, which has no intention of joining the euro.
If,  as is likely at the end of its proposed renegotiation, the UK is dissatisfied with the result, because not enough powers are being handed back to Westminster, it will have little option but to recommend that the UK withdraws from the EU. 
 It is setting itself up now, to find itself in exactly that position, in 2016.
THE UK’S OPTIONS OUTSIDE THE EU
 This will require careful handling because 50% of UK exports go to the EU, and London is Europe’s main financial centre, for the time being anyway.
 How is the UK to protect these interests if it is outside the EU?
One possibility is to join Norway, Iceland and Liechtenstein in the European Economic Area, which would guarantee full access for UK goods and services to the EU market. But the price for that would be having to implement all EU legislation that was relevant to the Single Market, and contribute to the EU budget, but without having any say in EU decisions.
That would be worse from a Euro sceptic point of view than the UK’s present position, even though it would guarantee continued access for the UK to the EU market for both goods and services.
The other possibility is to follow Switzerland and negotiate a series of bilateral trade deals with the EU. The UK would not be entering such negotiations from a position of strength, because it relies more on the EU market, than the EU relies on the UK market.
Switzerland has negotiated full access to the EU market for goods, but not for services. Services are the UK’s key export sector, so a Swiss style deal would not be attractive.
If Britain negotiated a Customs Union with the EU, like that of Turkey, it would find its trade policies with the rest of the world were still being determined in Brussels, but with less input from London than at present. Again it would also only have a guarantee of access for goods exports but not for services.
Finally, the UK might simply leave the EU, without negotiating any special deal. That would leave it paying tariffs on its exports to EU member states, including Ireland, and would necessitate the reintroduction of customs posts on the border in Ireland. It would undermine years of peacemaking by successive   Irish and UK Governments, and would cost thousands of jobs in export firms in both the UK and Ireland.
CONCLUSION
My sense is that the pressures that cause fracture in the EU derive from a lack of understanding among the general public of the extent to which their livelihoods  depend on economic developments in other  countries and of how unrealistic, in modern conditions, is an “ourselves alone” policy.
 Political leaders make little  effort to explain this, because to do so would undermine the  nationalist myths which brought most states into being in the first place, and also because it is often convenient to blame the EU for  the effects of decisions that were necessary but are unpalatable. For these reasons, little effort is made to forge any form of patriotic pride in the EU or its achievements.
No venue has been created in which an EU wide public opinion might be formed.
This must be done, if sufficient mutual understanding and support is to be created to allow the EU to create the degree of burden sharing and mutual supervision that is necessary to guarantee the long term  robustness of the euro, and thus of the EU itself.  In a word, the EU needs more democratic cement to hold itself together.
European Parliament elections are not truly European. They are 27 different elections, in 27 different countries, in which national issues predominate.
The European Parliament itself has refused to contemplate the election of some of its members from EU wide party lists, which would begin the process of creating an EU wide debate because it would necessitate an EU wide political campaign on behalf of the rival EU wide lists of candidates.
The President of the European Commission, and the President of the European Council, are selected in private meetings of heads of government. They do not have to win the votes of EU citizens, and consequently EU citizens do not have the feeling that they can vote the government of the EU out of office, in the same way that they can vote their national government out of office.
Thus the EU does not enjoy democratic legitimacy in quite the same way that national governments do.
As a member of the Convention that drafted what eventually became the Lisbon Treaty, I urged unsuccessfully that the EU should have a Presidential election on these lines.  I suggested that the President of the European Commission should be selected in a multi candidate election in which every EU citizen would vote, rather than be selected, as at present, by 27 heads of Government, meeting in private, to be approved in a single candidate vote in the European Parliament.
This proposal received almost no support at the time, although it has since been adopted as policy by the German CDU. If that had happened when it was proposed, the EU would now be in a much stronger democratic position to devise a more coherent response to the euro crisis, and to find a solution to the UK’s difficulties. The UK press would not be able to argue that EU leaders were “unelected”. The Commission, headed by a President with a full EU wide democratic mandate, would have more authority to propose solutions. The council of 27 heads of government would still play a vital role,  but the EU would be less constrained by the electoral timetables of individual countries, as is the case with the German election of 2013.

THE EURO CRISIS…… IT IS A NEGOTIATION, NOT AN ACADEMIC EXERCISE.

The long running crisis in the euro area is caused, at least in part, by the fact that the participants in the bond markets have little understanding of, and for a long time had little interest in, how the  eurozone makes its decisions at political level.

In the past, these bond market participants assumed, without much enquiry as to why, that Greek  government bonds were no more risky than German Government bonds, simply because Germany  and Greece had  the same currency.

At that time, they took no interest in the internal politics, or  relative  competitiveness, of Greece and Germany. This misunderstanding often also encompassed economic commentators, especially in the English language media, who, then and now, are unduly influential in the mind of  bond market participants.

Then, in the wake of the shock of the Lehman collapse, everything changed.
The slightest political ripple now sends  amplified shock waves through the  bond markets, and the interest rates charged to lend to different  countries  within the euro zone  vary greatly. Long ignored indices are now scrutinized obsessively.

Both bond buyers and economists, having blithely ignored the EU political system for years, now  crave complete and definitive answers from it, and they want those answers  yesterday!
Of course, the markets worry about the viability of the public finances of individual countries or of their banks, but an even greater concern is to know whether a particular country will stay in the euro in all circumstances.  A country leaving the euro could impose an immediate and shocking loss on lenders to that country, and to its banks.

So the first priority for the markets is convincing them that, no matter what happens, nobody is going to leave the euro. That is a matter of political conviction, not macroeconomic analysis. After that, everything else can be negotiated.

But the political leaders of the euro zone come at things from a very different angle to that of the  commentators and bond buyers. While the political leaders understand the bond buyers  craving for  certainty, they are  engaged in a complex multidimensional political negotiation, in which they have to balance the interests of  17 different sets of national taxpayers, some of whom want to shift liabilities to someone else, and others of whom  who want to  take on  as little  liability as possible, for the debts of others.

 The political negotiation is further complicated by the fact that the EU does not  yet have the  legal power to do some of the things it needs to do, and  some of its members  want to withhold  agreement to giving it those powers, in pursuit of national concessions . Britain is the most outstanding example of this, but more recently Italy played that game. In Ireland, one political party wanted to veto the ESM, which is beneficial to Ireland, simply to get concessions on something else. This sort of silly thing goes on often in EU negotiations, because EU negotiations are conducted by humans, not  by angels.

While there is a European Union, the people who make the final decisions for the Union are national politicians, elected by national electorates, and the national electorates frequently do not understand one another very well, or choose not to do so.

The cheap caricaturing of Germany in some other EU countries has been matched by equally  juvenile caricatures in parts of the German press of other countries, like Greece.  Sometimes the critics have a point, as when Germans complain about the possibility of  extending  their credit to countries ,like France, which  are reducing their  retirement  age to  60, while Germany  feels it has to raise its retirement  age to  70 to maintain German creditworthiness.

As well as making decisions, leaders have to bring their parliaments, which reflect these very diverse electorates, along. Sometimes they need a two thirds majority, as in Germany, or a referendum, as in Ireland.

To use a construction analogy, the markets want the EU to produce a fully constructed and furnished building in time for next week’s bond auction.  But the politicians are trying  to  build the  foundations without having  finalised the architectural drawings,  while  simultaneously arguing about the height of the building, investigating whether  they can buy some units prefabricated, and deciding  how much  bricklayers are paid  per hour by comparison with carpenters.

That’s politics, and this is a political negotiation. It is the way it has to be. No one is going to show their full hand until the moment they are satisfied that everyone else is going to show their hand too.

But commentators criticise the outcome of individual meetings as if it was not a political negotiation, but an academic exercise, and the 17 euro zone leaders were  “Platonic guardians” unconstrained by anything except the requirement to produce a theoretically symmetrical outcome.

For example, one notable commentator (Wolfgang Munchau in the Financial Times) announced recently that the crisis was going to last 20 years, just because Angela Merkel had not accepted that there would be joint euro zone insurance of deposits in euro zone banks, before she had seen the details of exactly what level of central scrutiny of their banks, the other countries would accept, so as to ensure that they would not take a free ride on the backs of German depositors.

What did he really expect? Mrs Merkel will not show her hand until she absolutely has to, any more than Enda Kenny or Francois Hollande will.

Likewise, it is unrealistic of people, like Nouriel Roubini, to  demand that the size of the  ESM fund be doubled  or trebled at this stage, before anyone knows for sure whether the  intended beneficiaries of an enlarged ESM will do all that is required of them, to deserve the money.  Uncertainty about the size of the fund, and doubt about whether it will be big enough in all circumstances, is essential as an incentive to get debtor Governments to do the things they need to do, to be sure they do qualify for the fund, if they need it. 

The Euro area Summit statement of 29 June said it was “ imperative to break the  vicious circle between banks and sovereigns.”.

But it also said that, for EU funds to be directly invested in banks,  an “effective (European) supervisory mechanism” would have first have  to be established, and that any injection of funds would have to be accompanied by conditions that would be  “institution specific, sector specific, and economy wide”.   So a deal will have to be negotiated in respect of each individual bank, each national banking sector, and each country.
According to a paper published recently by the highly regarded  Brussels based think tank, the Breugel Institute,  a  European Banking Union  would require decisions on at least 8 big questions

  1. whether to include countries not yet in the euro
  2. whether  to bring all banks under direct EU supervision, or just the big ones
  3. the scope of an EU wide deposit  guarantee, as to the  amount covered and whether there would have to a local contribution, without which the system might be abused
  4. an EU wide system for closing banks  down and distributing the losses between  shareholders, different classes of creditors, taxpayers and other banks in the  country in question and elsewhere. Associated with this is the question of requiring all banks to draw up “living wills” to say what would happen if they go out of business
  5. Some form of limited  euro zone wide taxing capacity to act as a back stop if  the deposit guarantee fund proves insufficient.
  6. how to  distinguish between past, and potential  future liabilities
  7. the proper focus of euro zone bank  supervision. Should it be on capital ratios, liquidity ratios, business models, diversification or other variables? Should different  types of banking be separated from  one another, or  does a  mixed system make it easier to get over  short term  difficulties?
  8. what to do about Britain, which wants nothing to do with the euro or a a European Banking Union, but still  wants unfettered access to euro zone financial markets  on the same terms as everyone else.

These are difficult political issues and they will need to be resolved in a way that is BOTH theoretically sound, AND politically balanced, between all the 27 countries in the EU. Patience  will be required.

THE FISCAL COMPACT TREATY—THE CHOICE THE IRISH PEOPLE HAVE TO MAKE

BASIC PRINCIPLE BEHIND COMPACT WAS ACCEPTED BY IRISH PEOPLE TWENTY YEARS AGO

Most of the   commitments in the Fiscal Compact Treaty (formally known as the Treaty on Stability, Coordination, and Governance i the Economic and Monetary Union) are ones to which the Irish people have already agreed in principle in previous EU related referenda.
Irish people voted on 18 June 1992 to ratify the Maastricht Treaty. In so doing we democratically committed ourselves to a single currency, stable prices, sound public finances and a sustainable balance of payments. As we have learned, we have failed to adhere to the last two of these, sound public finances and a sustainable balance of payments.
We also committed ourselves in that referendum to treat economic policies here as a “matter of common concern”, which we would “coordinate” with our partners in the European Union. In particular, we committed ourselves to keep our Debt/GDP ratio below 60%, and our budget deficit below 3% of GDP.
 It was natural that we should have agreed to this, once we agreed to a common currency in the first place.
 If one country in the euro was free to “print” as many euros as it liked, by running uncontrolled Government deficits, that would automatically debase the value of the currency, and rob other countries in the euro of the value of their savings.
I make these points simply to reiterate that the Fiscal Compact Treaty does not involve some new principle or some novel incursion into national prerogatives. We accepted EU involvement in our budgetary policies twenty years ago, and we did so by the most inclusive method possible, by a referendum in which every voter had a say.
WHAT IS NEW ABOUT THE FISCAL COMPACT TREATY
In essence what the Treaty does which is new is to require us to incorporate into our
 “national legal systems through binding and permanent provisions, preferably constitutional” 
a ” balanced budget rule”.
A   balanced budget   is something we have accepted as a goal when we accepted the Maastricht Treaty , in the Stability and Growth Pact agreed in Dublin in 1996, and in detailed rules that were brought into force late last  year, under existing EU Treaties, as part of the so called “six pack” of measures to confront  the  financial crisis.
The novelty in the Fiscal Compact Treaty is that it defines a balanced budget more precisely, and requires that each country write a requirement to have a balanced budget into its permanent law.
What is new therefore is that we will no longer just rely on EU level rules to ensure that we move steadily towards balanced budgets. If we accept the Fiscal Compact Treaty, we will incorporate that requirement into our own domestic permanent legislation as well.
The Fiscal Compact Treaty defines a balanced budget in a very specific way. It says that a country will have a balanced budget if
“the structural  balance of the general government  is at its country specific medium term  objective as defined in the  revised  Stability  and Growth Pact with a lower limit of 0.5% of  its GDP at  market prices”
A rule along these lines has to be written into the country’s own  permanent law.
A “structural “  balance  is different from an ordinary budget deficit or surplus. It is an estimate of what the deficit or surplus would have been if economic conditions were normal.
In other words, if the economy is in the middle of a temporary recession or depression, it might have  a budget deficit, which would become a surplus of its own accord, without any  change of tax policies or spending commitments, once conditions returned to normal.
Conversely, if a country is in the middle of a temporary boom, it might have an apparent budget surplus in ordinary money. That was the position Ireland was in from 2002 until 2006. But once conditions returned to normal, if tax policies and spending commitments remained the same, the surplus would turn into a deficit. This is what happened in Ireland after 2008.
There are obvious difficulties in defining what “normal “conditions are.  If the concept of the economic  cycle is used to determine what is “normal”, there will be debate as to when the cycle began and when it will end.  But the definition would have to be exact, if it is to be legally enforceable as a means of forcing a country to change its budget.
This is where the words in the Treaty about a “country specific medium term objective as defined in the Stability and Growth Pact” come into play. This “medium term objective” will have to be negotiated between the country and the European Commission. So also would the time frame for reaching that objective. So the definition of what would be the permitted actual level of deficit or surplus, to comply with the 0.5% structural rule, would be negotiated in advance, and the budget would then have to comply with what had been agreed.
This detailed formulation of this will be incorporated in a Fiscal Responsibility Act to be passed into law by the Dail and Senate. It is important that we use the maximum scope in this legislation to define the term “structural deficit” in a way that takes Irish conditions into account.  For example Ireland is   dependent of foreign investment, which does not move in the same “cycle” as consumer spending does. Some argue that the Irish economy is so open , that it does not have an economic cycle in the normal sense at all.

AN IRISH RULE, ADMINISTERED IN IRELAND, TO KEEP IRISH POLITICIANS IN LINE
 But the bottom line is that, where previously we might have relied on external EU disciplines to keep spendthrift politicians in line, we will, if we accept the Treaty, commit ourselves to introduce permanent Irish laws to do so as well, to reinforce the rules we have made at EU level.
 In general this is a better approach.
 It is much better, in the first place, to have an Irish Fiscal Council, composed of  people most of whom  live here in Ireland , forcing an Irish Government to recast its budget, to  bring it into line with an balanced budget rule, as negotiated with the European Commission .This is preferable to relying solely  on Commissioners in Brussels to  do that job of keeping  our finances honest. That is the basic change that the Fiscal Treaty will bring about.
When is the risk of dishonest, or unbalanced, budgets most likely to arise?
The biggest dangers will be in the year before a General Election, and when the economy is booming.
Part of our problem today is that we had unduly expansionary budgets in 2002, and 2007, just before the Elections in those years. The 2007 budget, in particular, contributed a lot to today’s problems.  That temptation will arise again.
When the economy is booming, revenues will be flowing in, the temptation, to agree to permanent spending commitments that one ultimately cannot afford, will be greatest .
 That is what happened in Ireland during the time when there was an artificial and temporary housing boom, revenues from house sales were flowing in, and the Government agreed to permanent   increases in pay, welfare and pension levels, on the strength of revenues flows that could not last.
 A strong balanced budget rule, written permanently into Irish law, administered by Irish people, would ensure we do not repeat those mistakes ever again. Of course, that Irish rule will be reinforced by EU vigilance.  And the terms of the rule will have to conform to  the Treaty,  and be subject to  appeal to the European Court of Justice on that point.
 But the first line of defence against another outbreak of pre election budget irresponsibility will in future  be in Dublin, not in Brussels.
Rules like this have had a good effect elsewhere.
 In Chile, Government revenues are  dependent on royalties from copper of which the country is a major producer. A balanced budget rule in its constitution has forced the Chilean Government to run big surpluses when copper prices were high. As a result, when copper prices fell, Chile had the savings to maintain its social programmes without big cuts.
 Without a balanced budget rule in its constitution, the Chilean Government  would have had  great difficulty  persuading its people  that it should run a 10% budget surplus during the copper boom.
But if it had not done so, it would have had difficulty maintaining spending during the downturn in copper prices.
In Sweden, a balanced budget rule forced the Government to run surplus budgets during the   boom, and ,as a result, Sweden has come through the recent  crisis in much better shape than almost any  other  EU country.
EVEN WITHOUT THE TREATY, IRELAND WILL HAVE TO HAVE ‘STRUCTURAL’ BUDGET SURPLUSES ANYWAY
In the short and medium term, the balanced budget rule , which will require  every country  in the euro to have a “structural “ budget deficit no greater than 0.5% of it GDP, will have little effect here.
This is because Ireland is already obliged anyway, under new rules made last December pursuant to the Maastricht Treaty, to systematically reduce our Debt/ GDP ratio to  60% . Our Debt/GDP ratio   will peak at around 120% in 2015, so for the following twenty years, Ireland will have to run substantial budget surpluses to enable us to reduce the debt/GDP ratio, either by a repayment of debt , an increase in the GDP, or a bit of both combined.  It will only be when the Debt has been substantially reduced, that the 0.5% rule will take over as a discipline. And, as I have said earlier, this rule really only makes a difference in boom times. When times are bad, the markets force a country to  try to reduce its deficit anyway, because otherwise it will have difficulty borrowing.
The Fiscal Compact will not prevent countries running budget deficits during recessions. The 0.5% limit takes account of normal up and down cycles in the economy. That is what the word “structural” before deficit means. That is why even non euro countries like Sweden, with generous welfare systems, have signed up to the Compact. The idea that the Fiscal Compact outlaws Keynesian counter cyclical policies, put forward by commentators like Fintan O Toole, is wrong.
There are a number of other things in the Treaty, which simply reiterate and entrench rules that have been already adopted. There are also new provisions for Euro area Heads of Government to meet more often , and  for  the Dail’s budget committee to work more  closely with committees in other  Euro area parliaments.
To summarize, the Treaty will bring greater credibility to the finances of all EU countries. It complements controls at EU level with new controls at national level. For these reasons, I  urge people to vote  Yes in the referendum.
It is important now to turn to what might happen if people were to vote No. Some will argue that we should consider that as a tactic, a sort of bargaining approach.  That worked in the past, they might say. Why not try it this time? This time the rules are different, and the potential downsides are much bigger.


THIS DECISION, THIS TIME, IS NOT THE SAME AS THE ONES ON LISBON AND NICE

If Ireland votes No to the Fiscal Compact Treaty, and as a result the Irish Government is prevented from ratifying the Treaty it has already signed, the Treaty will probably come into effect anyway for the countries that have ratified it.
This is because the Treaty itself provides that, once 70% of euro area states have ratified it, it comes into force.  So if 12 of the 17 states ratify, we have the Treaty in effect for those 12 countries. No matter what the other 5 do.
 This means that the  scenario whereby Ireland was able to vote No to the Nice and Lisbon Treaties and, because Ireland’s ratification was essential for everybody else, it could negotiate for further clarifications or protocols to meet popular concerns  in Ireland, does not apply in this case.
 This sort of threshold provision is not unusual in international treaties.  Few international Treaties require ratification by 100% of signatories to come into effect.

DENYING OURSELVES ELIGIBILITY TO APPLY FOR EUROPEAN STABILITY MECHANISM
But a decision not to ratify would have a consequence for Ireland. The Treaty says
“the granting of assistance in the framework of new programmes under the European Stability Mechanism(ESM) will be conditional, as of  1 March 2013, on the ratification of the  Treaty by the  Contracting Party”
Ireland was a Contracting party, and if it does not ratify, it will not be eligible for assistance from the ESM.
We all hope Ireland will not need assistance from the ESM, and that once our present  EU/IMF programme expires  , we will be able to borrow, at  low interest  from commercial markets, all we need to cover   the ongoing shortfall between our tax revenue and our spending . But there is no guarantee of that.  We could find, when the EU/IMF programme expires, that commercial bond markets are still a bit nervous about Ireland, and  ask us to pay higher interest rates than we had  got used to paying to  our EU partners, and to the IMF.
Ratifying the fiscal compact Treaty is really like buying ourselves an insurance policy.
 We hope we will not need to make a claim on the ESM, but it is nice for us, and for those who might lend to us,   at least to know  that we are at least eligible to do so.

VOTING NO WOULD BE REJECTING AN INSURANCE POLICY………………… 

By voting No, Irish people would be saying that they do not need any insurance policy for our public finances after the current EU/IMF programme expires.
In that sense, I would argue that those who will be advocating a No vote to the Treaty, will, in practice, be advocating more, and faster, austerity in the immediate future.
To be able to survive without the possibility of turning to the ESM after the present EU/IMF programme expires, Ireland would have to convince commercial bond market lenders that we had everything fully and permanently under control, as far as tax revenue and spending was concerned. Only then would we be able to be sure they would lend to us at reasonable rates of interest.
 And we are not there yet, by any means. Even if we paid no interest at all on our debts this year, we would still need to borrow 10 billion euros to cover the gap between our spending on salaries, pensions, welfare etc and our revenue from taxes.
AND OPTING FOR FASTER AUSTERITY………………NOT A CLEVER MOVE 
In other words, we have what economists call a “primary deficit ’’ of 10 billion euros.
A primary deficit is the deficit we would have if we had no debts and had to pay no interest on debt. Most countries have debts. So most of them should run a primary surplus, so they have room to keep spending going, and also pay the interest they owe.
Ireland is not in that fortunate position.
 Our primary deficit will be about 4% of GDP this year and about 2% next year. This puts us in a vulnerable position because, even if all our debts were abolished (which is not going to happen) we still have to borrow new money just to keep going.  Those who think we can play hardball with bondholders or bond buyers, should keep the primary deficit in the forefront of their minds. 
We cannot tell them to get lost because we need  them to lend us some of the money  to pay salaries  etc, because  we are not raising enough tax ourselves yet, to cover  all of our  outgoings, even without interest on debt .
That is about to change. The Government is budgeting to have a tiny primary budget surplus in 2014, and a slightly larger one in 2015. 
In other words, if things go according to plan, we will still be borrowing in 2014 and 2015, but then  we will “ONLY” be borrowing to pay interest on, or roll over, past debts!
That is if a number of further, some yet unannounced, revenue raising and expenditure cutting  measures, are successfully implemented by then.
Suppose the Irish people reject the Fiscal Compact Treaty.
Then, to be sure we would be able to borrow without the possibility of turning to the ESM, I believe we would have to introduce a budget for 2013 that had no primary deficit at all.
This would mean  about 5 billion euros more spending  cuts  and tax increases than are now planned by the Government in agreement  with the EU and the IMF.
 I have no doubt that the advocates of a No vote do not want that. But that is the logic of their rejection of the Fiscal Compact Treaty and its consequent removal of Ireland’s   eligibility to apply, as a fall back, for funds from the ESM, if we need them.
Of course, they will try to change the subject, rather than answer that key question. They will get into the blame game. But blame does not pay bills.
Some have suggested that linking eligibility to apply for the ESM with ratification of the Fiscal Compact is some sort of “blackmail”. If it is, then any condition imposed by any lender to ensure they have a good chance of getting their money back could be called blackmail.  It is not blackmail. No one, with any sense, lends money with some conditions to secure repayment.

IT IS NOT ALL ABOUT BANKS, IT IS ABOUT DAY TO DAY SPENDING TOO

Advocates of a No vote might say Europe owes us the money anyway, because, they will say, we indirectly bailed out Europe’s banks, when we bailed out our own banks.
There is some truth in that,  as I pointed out to President Barroso of the European Commission myself  when he made some one sided remarks about Ireland in the European Parliament, but it is beside the point as far as the decision we have  to make now is concerned.
Of Ireland’s present national debt, only 21 to 27%, or 37 and 46 euros billion of it,  is attributable  bank rescue.
The rest is due to
1.) servicing other debts we have run up which have nothing to do with our banking problems and
2.) funding   the gap between day to day Government spending and revenue, a gap that is still very wide,
We have to find this money  by  borrowing…….from someone,   among  lenders who has plenty of  other  options for the use of their money apart from lending it to us.  
CONCLUSION
The next few years will not be particularly easy.
We have made progress. We have a balance of payments surplus. People are accumulating savings. Foreign investment here is at an all time high. But consumer confidence is low, and unemployment high.  The oil price rise is a threat, but the increased demand for food is an opportunity. Confidence in politics has been shaken by the Tribunal findings, but the Irish political system is fundamentally stable and capable of making decisions.
Ratification of the Fiscal Compact Treaty would reinforce the sense that Ireland is getting its act together. Failure to ratify would not derail the euro, which can go ahead without us, but it would, unfortunately, derail Ireland. 
Speech by John Bruton, former Taoiseach, and current vice President of Fine Gael, at meeting on the Fiscal compact organised by Malahide branch of Fine Gael in the Grand Hotel, Malahide, at 8pm on Monday  26th March 2012

 

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