If you’re not at the table, you’re part of the menu

Angela Merkel, chancellor of Germany (picture Jacques Grießmayer)

By Patrick Mc Nally

Is it so radical?

January 2012, another European Summit and yet another treaty. A treaty that Germany wants but the other 26 countries do not. The treaty’s final text is an acknowledgment of German dominance in Europe rather than an acceptance of German stability-driven anti-Keynesian economic thinking.

The new treaty is designed to reduce mismanagement of public finances in the eurozone. After Ireland’s fiscal disaster more checks and balances in the political system are to be welcomed and not feared. They will severely limit the room for manoeuvre of elected governments for years to come and restrict the ability of politicians who use economic policy for electoral gain. President Van Rompuy sees the treaty as being more about self-control rather than austerity.

The treaty requires that public spending is broadly in line with tax revenues over the medium term. It requires, at a European level, a greater domestic commitment to fiscal discipline on the part of eurozone countries in order to rebuild mutual trust in their finances and each other. It is a necessary condition for the introduction of other measures to improve the stability of the euro,

There are two views circulating here in Ireland in regard to the proposed treaty. The first is that the new treaty will mean that Brussels will be more intrusive and that financial supervision will be more intensive as national budgets are synchronised. The argument is that Ireland is signing up to a generation of austerity and that while Ireland remains in the EU and the eurozone structures there is no chance to develop a realistic alternative economic policy. The country is therefore tying future governments to a certain fiscal policy which calls into question the nature of Irish democracy.

The other view is that there is nothing new in the proposed treaty that we have not signed up to already. What is new is the mechanism which countries will be obliged to create to ensure compliance and this is merely the latest attempt to make it harder for governments to evade the uncompromising strictures of Europe’s economic rulebook.

The bigger picture is that the fiscal treaty is not the solution to the debt crisis. It is the price that donor countries demand for providing the solution. There is also a broader agenda which we can see in Dr Merkel’s frequent press interviews where she speaks of the need for an eventual creation of a European political union – which is now likely to come sooner rather than later – with many more national powers ceded to a central government, with a strengthened bicameral European Parliament and the European Court of Justice assuming the role of Europe’s supreme court.

German officials now acknowledge that the treaty agreement puts more pressure on Berlin to move on issues from pooled sovereign debt to a larger bailout fund. The treaty provides a perquisite for Dr Merkel to embrace eurobonds and increase German’s commitment to bailout loans. She can sell the treaty as a German-led paradigm shift to more discipline in European finances and this should help in terms of German domestic politics.

For German MPs facing their electorate there is no sense of a German march on Europe but rather a series of retreats. First they were told that Greece could support itself, then a one-off loan was required, now a second bailout is necessary. The temporary European rescue fund has now become permanent. At every stage Germany has been the largest financial contributor thus attracting voter ire. We are clearly on the verge of the biggest change since the foundation of the EEC. The question is whether the European electorate is willing to accept these changes.

There has also been a cultural shift between the Commission and national governments with France and Germany making the running without reference to the president of the European Commission. This explains the plea by Catherine Day, Commission secretary general, that smaller member states should support the Commission against the French and German domination of the EU’s agenda. The smaller countries appear to be flexing their muscles a little as there appears to be an emerging backlash against this dominance.

Is a referendum necessary?

A recent opinion poll shows that three-quarters of Irish citizens want a referendum on the new treaty. Ireland is no longer the europhile country it once was, as it is not clear to Irish citizens that Ireland has been rewarded for being Europe’s poster boy in meeting EU / ECB / IMF targets. The treaty has therefore been specifically crafted to minimise the possibility of an Irish referendum. When the final treaty is signed at the European summit planned for 1 March the Irish Government will decide if a referendum is necessary. The stakes are high for the state is not really at liberty to stay outside the treaty, even if it turns out that this is what the public wants. Failure to accept the treaty means loss of access to the permanent European Stability Mechanism when the facility is established in mid 2012.

The Attorney General, in the meantime, is currently studying the draft text to see if the treaty is compatible with the constitution. If the Attorney General decides that a referendum is unnecessary it is expected that the decision will be challenged by an appeal to the Supreme Court by one of the opposition parties. A request for a referendum could be based on the treaty requirement that binds future governments to fiscal requirements and aims. This will limit future freedom of action to the extent that sovereignty is circumscribed. The crucial question is therefore to what extent the treaty limits governments in the future.

The other option is for the president to refer the Bill to the Supreme Court to test its constitutionality under Article 26 of the constitution when his signature is required. If the Court decides the Bill is constitutional it would fireproof the government against further challenges on a referendum and it has the further advantage that it avoids the perception that the government was forced to yield on the question of a referendum by the opposition.

An interesting press item has appeared over the weekend. Declan Ganley of Libertas fame has purchased the yestoeurope.ie website which was used to promote a “Yes” vote during the 2009 referendum campaign. If you click the website you are linked to the German Federal Ministry of Finance website.

The austerity template

An old policy question has arisen as a consequent of the financial crisis. Should economic policy be based on a pre-specified set of rules or should policymakers have discretion to set policy as they see fit? During the depression of the Thirties the independent role of the Bank of England under Montague Norman was seen as too rigid to deal with the crisis. After the Second World War, the independence of the Bank was curtailed until new Labour came to power in 1997. The fashion has now changed again towards independent central banks.

During the current eurozone crisis, that nobody foresaw, the ECB has been forced to take actions nobody envisaged. Its lack of accountability, flowing from it having been made the most independent central bank in the world and enshrining that independence in constitutional law, has only recently become clear. This conflict is being played out between Germany and France in regard to eurozone governance.

From the Irish perspective, ECB monetary policy is seen as playing a role in Ireland’s financial crisis by fuelling the credit bubble and by the Bank’s failure to monitor that situation. There is also the feeling that Ireland is being asked to shoulder too great a share of the bill for the financial crash and the Bank’s insistence that the state repay non-guaranteed bond holders in full, has never been fully explained in public by the Bank.

What is the reason for this German insistence on financial austerity? As usual it is experience learned from their history from the development of the post war economic recovery to the incorporation of East Germany into the West German economy after the fall of the Berlin Wall. In the view of German finance minister Wolfgang Schäuble, Greece and the other programme countries need a collective national mentality shift similar to that which East Germany had to undertake. This shift allowed economic and structural changes to take place. German unification only came about because the people in East Germany didn’t want to go on living as they had been before. The biggest problem was that it wasn’t possible to transform eastern Germany immediately to western standards. The massive investment and stimulus programme planned for eastern states could only work if encrusted East German structures were dismantled first. The Finance Minister comments that he has never ruled out further eurozone stimulus measures or even extending further Germany’s liabilities in the eurozone, nor has he ruled out eurobonds. He believes the time is not yet ripe for a stimulus. According to this view austerity and stimulus are equally important but in that order. He believes that the German public is still in favour of helping out Greece, but it cannot be a bottomless pit. For this reason Greece must finally build a bottom to their pit, then Germany can add something. Mrs Merkel’s policy is for discipline, structural change and for growth in that order within the eurozone. The current German position is that the fiscal treaty is essential to win back market trust

The next step

The current financial crisis has led to a level of political toxicity between countries never before seen in the history of the European Union. The European project is an economic solution to a political problem, namely the relationship between France and Germany and the need to dissolve Germany in Europe. The current crisis has brought Ireland’s relationship with Europe to the centre stage and foreign nationals are contributing to that debate.

According to the President of the American Chamber of Commerce in Ireland, Ireland’s involvement in the European Union is vital for attracting investment from overseas and is a strategic interest of US firms seeking to invest in Ireland.

China’s Vice President Xi Jinping came to Ireland on a three day visit last Saturday, expressing support for European integration and stating that the eurozone crisis was only temporary. He stressed Chinese support for a strong Europe and a strong eurozone. He did not exclude Chinese support for both the temporary and permanent loan facilities. It is anticipated he will become President of China next year when power is transferred to the next generation.

According to Thomas Klu of the European Council of Foreign Relations, the political choice is for national leaders to take charge and assume control, initiating a bold jump into a federated eurozone power or they can yield to the power of the markets.

Others argue that that the future of Ireland will lie in an EU in which member states pool their sovereignties even further and that national sovereignty will have a very different meaning then it had in the last century. Shifts within Europe permit sovereignties to evolve and this is better than being at the mercy of the markets. A federal Europe is being forged by current events and the current eurozone crisis can only be resolved on a European basis. At a world level the future will be governed by larger political entities. Britain’s isolation in trying to protect the most powerful bastion of finance capitalism, the City of London, may go down in the history books as a last-ditch effort of the international finance lobby to avoid tighter financial control by democratically elected governments. The European Union needs to establish itself as a polity for its citizens rather than merely as a facilitator for the free movement of capital, goods and services.

Joschka Fischer was in Dublin recently. He made the point that Europe is at the crossroads, and that the root cause of the current eurozone crisis is a political crisis. and that Ireland will pay a high price if it rejects further integration. Unless the political power in Europe is Europeanised with the current confederation evolving into a federation, the eurozone and the EU as a whole will disintegrate. The German Ambassador made a similar point but phrased it rather differently, namely that the only way forward was to repair the defects at the heart of the euro’s construction, which was the failure to create a genuine political and fiscal union.

It appears that Irish voters will be expected to understand, if they are asked to vote on the treaty, that the treaty provides far more than rules imposing fiscal discipline but opens the way for a German commitment to some form of deeper political union

Fischer recognises that the democratic deficit implied in the treaty changes and proposes a second chamber in the European Parliament to represent national parliaments. He believes that the direct election of the European Commission president will not solve the democratic deficit because there is an absence of a European polity. He notes the difficulty of the European Parliament in achieving legitimacy and the decline in voter participation in European elections even though the powers of the European Parliament have increased.

Mrs Merkel’s vision will encourage a debate which Europe is now more ready to listen to. Using federal methods in the EU does not mean creating a federal state – for there are different kinds of federal structures – but it will contribute to a better way to combine shared rule and self-rule and the politics of doing so can create a demos that was not there before.

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