Although European leaders agreed on December 9 to a new fiscal compact intended to address the Eurozone’s debt crisis, they failed to achieve unanimity. Britain exercised its veto by holding out for safeguards to its financial sector making it impossible to include what was agreed in the European Treaty.
Instead what the remaining 26 EU leaders agreed to in Brussels was to the significantly stronger co-ordination of economic policies and that national budgets should in future be balanced or in surplus. However, how this will be monitored and policed remains a contentious issue.
In outline the 26 accepted that in future the definition of a balanced budget will be when an EU state’s annual structural deficit does not exceed 0.5 per cent of gross domestic product. To ensure this happens, EU nations other than the UK will have to agree to legislate for this at a national level and to issue their debt plans in advance. It was also agreed that if a Eurozone state in future was in breach of a 3 per cent deficit ceiling, there would be automatic sanctions, although how this would work in practice is unclear.
It was also agreed that a bailout fund – the European Stability Mechanism together with the European Financial Stability Facility – will be able to provide support up to an overall ceiling of €500B (US$651B) and that some €200B (US$261B) would be provided to the IMF in the form of bilateral loans to enable it to help provide support to European states in difficulties.
Since that time, however, there are signs that these arrangements are unravelling as national parliaments, electoral politics, and states in the Eurozone periphery that use their own currencies have begun to have second thoughts about the implications of all of this for their economic independence and sovereignty. More generally there is a feeling that some European leaders seem only to have agreed to the accommodation in order to deal with the immediate crisis rather than because they believe that it is a solution that will work in the longer term. As a consequence significant doubts remain about the long-term coherence of the European Union and the prospects for lasting stability for the euro.
So much so, that as this being written it appears that early French thinking that a new inter-governmental treaty enshrining what was agreed might lead to some form of enhanced integration, is being watered down. What began life as a substantial draft document is now said to be as short as two or three pages and removes, with German acceptance, the introduction of the parallel bureaucracy to the European Commission for the Eurozone that France had hoped for.
Maintaining a consensus among the 26 may also not be helped by the UK seeking to seduce some states to its position so that Britain will no longer be, as the UK’s Liberal Democratic Party suggests, “Billie no friends“ in Europe. What happens next is therefore hard to imagine.
In an ideal world more money would be made available to lend through the IMF to Europe by those European nations in surplus or by others such as China and Brazil that may reluctantly see saving the Eurozone as the only way to support long-term global economic stability. But alarmingly a broader message is now coming from the IMF to the effect that if all nations do not act together, the world could find itself in a crisis of similar proportions to that which hit the world in the 1930s. In the last few days the Managing Director of the International Monetary Fund, Christine Lagarde, has said that the escalating economic crisis needed to be addressed now and as collectively as possible. Without action, she said, the world faces the spectre of a depression.
Ms Lagarde was speaking after it became apparent that a growing number of European countries were unlikely to back a new inter-governmental treaty.
Her prognosis was gloomy. “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating,” Ms Lagarde said. She warned also that if the international community did not work together, the risk from an economic point of view was rising protectionism and isolation.
She added: “It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.” Mrs Lagarde said global economic leaders needed to take a holistic approach toward addressing systemic weaknesses, such as those exposed by the current euro crisis. “It is going to require efforts, it is going to require adjustment, and clearly it is going to have to start from the core of the crisis at the moment, which is in the euro zone,” she said.
Unfortunately half measures now seem to be the order of the day. From the less than specific agreement reached in Durban on a new UN climate change treaty to the consensus at the World Trade Organisation not to discuss the Doha Round at this week’s Ministerial meeting in Geneva, it has become easier to agree matters of principle than to reach a binding agreement.
This caution is because all states know that a reordering of world power is underway, the global balance of economic power that prevailed for much of the latter part of the twentieth century is at an end, and their electorates want to maintain their previous standard of living.
This may not be possible.
Most probably Europe’s fragmentation will continue and nations in the periphery of the Eurozone will not be able to agree to a policy that effectively requires other nations to accept their national budgets.
The consequence is a possible core Europe of 17 states; an uncertain periphery of continental nations; and a semi-detached United Kingdom afloat somewhere between the US and Europe, hoping perhaps to provide leadership to the orphaned nations around the edge of the Eurozone.
It ought to cause the Caribbean to think hard about the nature of its future dialogue with Europe.
Previous columns can be found at www.caribbean-council.org