Thursday, 19 January 2012

Fiscal Pact Divides Europe





The decision of 26 EU states to agree to a new fiscal pact (read: coordinated austerity) at the last EU summit was met with self-congratulation and new claims of optimism.

However, within less than a month all of this has dissipated as it becomes clear that a strategy of dealing with the crisis purely through public spending cuts is entirely insufficient. In turn countries outside the eurozone, amongst them Poland and the Czech Republic, have begun to question the wisdom of participating in such a fiscal pact.



The decision of the Standard & Poors Rating agency to downgrade the credit ratings of nine eurozone countries (including France) is a sure sign of how the markets are far from convinced that the EU’s current economic strategy will deal with present crisis. This is not just implied but, as the economist Paul Krugman points out, clearly set out in a statement by Standard & Poors:

We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues


And it is not just the markets that are unconvinced. Although Britain was the only EU member state to not formally sign up to the pact, it is now unclear which of the other non-eurozone EU member states will participate in it. The Czech government, which expressed its uncertainty over the pact from the beginning, has now provisionally committed itself to holding a referendum on whether to sign up to the agreement. Furthermore, Poland, a country that both pushed for and then praised the signing of the new fiscal pact, has also expressed reservations about participating in it.


Countries such as Poland are caught between the contradictory positions of France and Germany. On the one hand, it has consistently opposed the approach of Sarkozy to create a ‘two-speed’ Europe, where an agreement would be exclusively for the eurozone member states. Correctly recognizing that this would lead to its own isolation, the Polish government has pushed Germany to unite all 27 EU states around a common programme of action. Following the EU summit, Poland could claim that it had successfully secured a place at the centre of economic policy making in Europe and announce that it would willingly sign up to the new fiscal pact.


Yet it soon became clear that things were not so straightforward. The Finance Minister Jacek Rostowski argued that the pact did not concern Poland as it was not yet a member of the eurozone. He pointed out that Poland already has its own internal limitations of public debt and also that it has signed an agreement with the European Commission to bring down its budget deficit. The Polish government is therefore unwilling to enter into yet another binding agreement, especially one where it could be fined for not meeting its obligations. As Rostowski noted ‘ we are not masochists and we will not take on extra, unnecessary obligations’




Some within the government have taken this approach a step further and have begun to question the wisdom of prioritising alliances with Germany and other eurozone states. The Vice-PM,and leader of the junior coalition party the Polish Peasants’ Party, has argued that it would be better to seek closer alliances with non-eurozone member states such as the UK, Sweden and the Czech Republic. His argument for this is basic: ‘It was not us that caused the mess, therefore we should not be first to clear it up’. Also on a recent visit to Rome PM Donald Tusk said that Europe "cannot allow itself to be led by Berlin and Paris alone", arguing that countries such as Italy and Poland should have a greater say on the issue of fiscal union inside the EU.


Behind all of these discussions lies the fact that the attempt to unite the EU around a common programme of austerity and budget cuts is not bringing its member states closer together but rather driving them further apart. The problem is that no viable alternative is coming either at a European or national level. For example, the country that has been most opposed to the fiscal pact, the UK, is pursuing its own independent policy of austerity that is pushing the country into an economic downturn deeper than that experienced in any of the other advanced economies in the world.

The fiscal pact is rapidly falling apart even before it has got off the ground, causing divisions between the EU states to intensify.


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