The “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” is a treaty to institutionalise synchronised austerity across Europe at the expense of basic democratic rights. If implemented, it will mean a further assault on the living standards of working people and will further deepen the economic crisis.
The central reason why this is an Austerity Treaty is the enforcement of the “balanced budget” rule contained in Article 3. This rule imposes a maximum structural deficit of 0.5% for a country with a debt to GDP ratio of greater than 60%, and 1% for other countries. Exceeding that amount will trigger an automatic “correction mechanism” - which means cutbacks and extra taxes.
What is a structural deficit? Essentially, it is a measurement of the deficit in an economy when cyclical movements in the economy and one-off expenditures are taken out of the equation. However, how to determine it is a matter of a lot of debate between economists with the result that different institutions can come up with very different figures. For example the IMF estimates that Ireland ran a structural deficit of 5.4% of GDP in 2006, while the EU Commission estimated a surplus of 2.2%! It also is really something that can only be measured with the benefit of hindsight, with the result that structural deficit estimates differ radically over time.
Countries that are in bailout programmes are shielded from these targets until they exit. Ireland is currently due to exit in 2014. The Department of Finance estimates that in 2015, Ireland will have a strucutral deficit of 3.7%. Bringing that down to 0.5% would mean at least €5.7 billion worth of extra cuts and taxes. It is more likely that the Commission would give Ireland a few years to meet the target. A target of 2017 would simply mean extending that austerity over three years, with around €2 billion of extra austerity per year. Those cuts would further reduce GDP, therefore necessitating yet more cuts!
If it is passed and implemented across Europe, this Treaty will not bring stability and growth, it threatens an absolute disaster. Austerity is already destroying lives and economies across Europe – with the Greek economy in freefall as a direct result, the Portuguese economy continuing to shrink and the Irish economy set to become the first in the EU to have six consecutive years of declining domestic demand.
According to the European Commission, in 2013, 18 countries out of 25 will have a structural deficit greater than their target, with an average deficit of 2.6 per cent. Reducing these deficits to the target levels in 2013 would mean at least €166 billion worth of cuts and extra taxes. That would have a devastating impact on the European economy. If a longer timeframe is given by the Commission, this will simply mean the same savage austerity drawn out over years.
A bondholders' Treaty
Article 4 requires countries with a debt to GDP ratio of over 60% to reduce it by one twentieth of the excess per year. In theory, there are two ways in which this ratio could be reduced. GDP could be increased or the debt itself could be reduced through paying back the principal. In practice, because of the austerity policies already being pursued and the implications of Article 3, the option of significant GDP growth is effectively ruled out.
Therefore, this Article in effect calls for a massive pay back of debt to the bondholders! In the Eurozone as a whole, the debt to GDP ratio is at 85%. Reducing that to 60% without GDP growth would require a reduction of €2.3 trillion of debt. This is a recipe for yet more austerity that will provoke a further contraction across Europe.
Ireland's debt to GDP ratio is likely to be around 120% in 2015. Reducing the debt to GDP ratio by one twentieth of the excess per year will therefore mean paying back €4.5 billion per year in principal to the bondholders on top of the €9 billion a year we will be paying in interest rates. This debt will only be paid back on the basis of yet more savage austerity imposed on working people.
Restrictions of major public investment
Articles three and four together demonstrate how this is an austerity Treaty in the interests of the bondholders and speculators. This is not simply one off austerity, but an attempt to enshrine it “through provisions of binding force and permanent character”. They mean that engaging in expansionary fiscal policy will be effectively made illegal.
While it is the case that often achieving a structural balance would be a worthwhile aim, it also often makes sense for a state to engage in borrowing and deficit spending in order to create employment and develop the economy. The need for massive public investment is particularly evident right now in Ireland. 450,000 people are on the live register and private sector investment has collapsed. Despite an increase in profits for the private sector (the gross operating surplus of non-financial corporations increasing by €2.6 billion in 2010) investment continues to decline (by €30 billion since 2007). On the basis of relying on the private sector, it is simply wishful thinking to suggest that the financial resources will be put together with the available skills and talents of labour to create jobs and wealth in our economy.
That is why massive public sector programmes are needed to get people back to work, as well as improving our infrastructure and developing our economy. If big business is not willing to invest, the key sections of the economy should be taken out of private ownership and into democratic public ownership and a democratic plan developed based on massive public sector investment to redevelop the economy.
Attack on democracy
The Fiscal Treaty is part of a process, with the economic crisis, that has seen significant attacks on democratic rights within the EU. For example, the unelected and unaccountable European Central Bank has become increasingly powerful – sending detailed prescriptions of austerity measures to the Italian governments for them to carry out. The unelected European Commission has played a central role in the removal of elected governments in Italy and Greece and their replacement by bankers' governments. This treaty is a significant attack on the basic democratic right to elect a government to decide on budgetary and economic strategy. It does this in two key ways.
Firstly, with the balanced budget rule it effectively ties future governments to the same economic policies as this one – neo-liberalism and austerity. It rules out governments running structural deficits – which could be used for investment in vital public works, to engage in necessary public spending and so on. It is surely one of the most basic requirements of a democracy that people are free to vote for different economic policies.
This has not come out of the blue – it is part of a process whereby economic policy has been technocratised. There has been a conscious attempt to use the crisis (a crisis of capitalism caused by speculators, bankers, neo-liberalism and deregulation, let us remember) to move economic policy out of the sphere of democratic discussion and to turn it into a purely technical question. So neo-liberalism is not posed as a policy choice, it is simply “responsible” behaviour.
The second key proposal diminishing democracy is the mechanism for countries to be effectively placed in administration. This is contained in Article 5 of the treaty, which says that countries in an “excessive deficit procedure” have to put in place a “budgetary and economic partnership programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of their excessive deficits.” These programmes will be endorsed and monitored by the European Commission and Council. In this way there is a surrender of budgetary powers to the Commission and Council; consequently it will not only be countries in receipt of bailout funds like Ireland, Greece and Portugal that will have their budgets effectively written by these powers.
A neo-liberal Europe
With the economic crisis, the illusions that so-called social democrats promoted about a supposedly social Europe have been smashed by the reality of a neo-liberal Europe. This Treaty goes further along that road of diminishing democratic checks and accountability of the leading bodies in Europe, in order to create a Europe where the interests of the bankers and billionaires come first. This Treaty writes economic policy into law in their interests, at the expense of the vast majority who will suffer under austerity. It must be met with a vigorous No campaign in the referendum but also with struggle in the streets and workplaces by workers across Europe against their agenda.
With thanks to Paul Murphy MEP of the socialist party ULA in Ireland for this e xcellent article on the bits I don’t fully understand.