The markets may have been right to extend cautious approval to the new fiscal agreement signed by European Union members (minus the United Kingdom) over the weekend, but it is worth wondering whether the celebrations are premature. Certainly, this eighth attempt at a solution goes further than the earlier ones in tightening fiscal discipline, putting more stringent oversight mechanisms in place and strengthening punitive measures for non-compliance. At the very least, these will ensure that debacles of the Greek kind — which involved sustained profligacy and outright budget fudging — do not recur. But the closer coordination and greater transparency of the treaty, though long overdue, may still fall well short of the kind of durable fiscal union that is required to contain the contagion of future indebtedness, with all its recessionary implications for the global economy.
For one, in the absence of norms to transfer funds from richer to poorer countries, and of a lender of last resort, it is difficult to see how future crises can be handled. Thus, where it is easily possible for, say, the US government to bail out indebted California without stringent conditions, there are no such provisions in this latest pact, though the idea has been discussed ad nauseam . This is unlikely to enthuse private lenders, especially given the haircuts they have been forced to ensure. The continuing lack of assurances for bond-holders does not augur well for the ^ 1.1 trillion of euro-zone debt that falls due next years. The kind of strict conditions that German legislators imposed on Portugal, Italy, Greece and Spain have found an echo in the new fiscal rule for balanced or surplus budgeting in Friday morning’s agreement. Several commentators have already raised the question of whether this is advisable in paying off current debt or generating stimulus for growth. Meanwhile, there is widespread recognition that the $270 billion member-governments agreed to raise to help the International Monetary Fund assist indebted European nations is grossly inadequate to meet current needs.
Though this pact goes further than previous ones in addressing Europe’s crisis, many of its gains have inevitably been subsumed by the political drama of Britain’s refusal to endorse Friday’s treaty. Representing a non-euro country, UK Prime Minister David Cameron could easily justify refraining from handing over fiscal sovereignty to an external body — and, indeed, make the argument that the crisis has vindicated the UK’s decision to stay out of the currency union. But in the larger scheme of things, Cameron’s “perfidious Albion” act makes little difference other than to isolate Britain within Europe, the consequences of which are by no means clear yet. But the striking fact that the 10 non-euro countries have chosen to sign up is probably the strongest indication that, warts and all, the demise of the euro as a currency isn’t imminent anytime soon. For that, if nothing else, Nicholas Sarkozy and Angela Merkel can justifiably claim credit.
