Europe & Growth Pact: A Child Of The Economy, An Orphan Of Politics

As we move towards the future, the situation is bleak. The decisions made at successive European summits do not seem likely to address the structural defects of the Eurozone. The disappointment with the Europe of today is that it deals with a constitutional problem as if it were merely an economic one. The fiction of the sustainability of Europe, a child of the economy, but an orphan of politics, continues to undermine European integration.

It is certainly true that the proposed banking union shows real progress. But only part of the union’s supervision has been defined, and it comes into force in 2014. Its other elements – the resolution of banking crises and deposit insurance – remain under national jurisdiction, and their European future is even more uncertain. There must be real solidarity, something which Europe lacks most of all.

We have the Growth Pact and the Treaty on Stability, Coordination, and Governance. To which future are they leading us?

As it was signed, the Growth Pact – investment projects financed primarily by existing structural funds and the European Investment Bank’s increased capital (10 billion Euros) – is not likely to transform activity in the Eurozone. We are talking about 120 billion Euros; even this is mobilising funds which have not yet been used, to enable the EIB to lend 60 billion Euros by leveraging its capital increase.

Whether or not a start has been made is a mystery. This is why the European recovery seems more symbolic than real, a remake of the addition (fiercely negotiated in 1997) of the words “and growth” to the Stability Pact. Because, at the moment, EU regulations and conditions for assistance to countries considered fragile have plunged these countries into depression and have delayed Eurozone recovery. Have we really helped Greece, given that its GDP is currently more than 20% lower than it was on the 1st January 2008?

It is difficult not to view the Growth Pact as the soothing balm applied to smooth the roughness of the “fiscal compact.” Therefore, we have a treaty which establishes the fiscal solitude of each of the Eurozone member states through a promise of greater solidarity if they show themselves to be capable of solving their own problems. It forces, or rather, it requires states to self-impose sanctions or risk facing penalties, to have fiscal rules that are found in no other democracy in the world. In fact, it aggravates the European democratic deficit, making member states even more federal, and, at the same time, even more the orphans of a federation.

Since the end of World War II, economists have been debating the question of whether to emphasise rules or discretion in economic policy. In the forties, Milton Friedman had already advocated adopting monetary rules and suggested enshrining balanced fiscal rules in the constitution. But it was the “revolution” of rational expectations and the neo-classical school which established in a “definitive” way the superiority of rules over choice. Much attention was given to this conclusion, which inspired monetary policy management in many countries. But no country gave up its fiscal sovereignty, or indeed its monetary sovereignty, since in all countries (except in Europe) central banks are accountable to national parliaments. The neo-classical school’s demonstration would only apply to a world without imbalance, where economic policy resembled Don Quixote’s fight.

But how was Europe, probably without knowing it, able to endorse such a doctrine?

The reason is that adopting this doctrine binds governments’ hands so strongly it prevents them from acting, even in circumstances like today where inaction is irresponsible. Social suffering worsens, unemployment soars, recession threatens the Eurozone and depression takes hold in many countries. Can we then do nothing to fight against these ills and against budget deficit reduction as the sole macroeconomic policy?

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