Treaty on Stability, Coordination and Governance: impact on the eurozone and the rule of law - European Scrutiny Committee Contents


3  The economic and political issues—the evidence

52.  To our surprise there was no fundamental difference of view between our economic commentator witnesses, Mr Bootle, Mr McWilliams and Mr Münchau, as to whether the SCG Treaty will work, in terms of ending the eurozone crisis. Their view is exemplified by Mr Bootle's comments:

    I don't think it will contribute a great deal, no. I consider it to be essentially motherhood and apple pie. There are a number of different issues. One of course concerns the enforceability of the fiscal compact, and I see nothing in what I have read to make it credible […].

    There is that problem but, more fundamentally, there is an issue about the nature of the problem that is facing the eurozone countries […]. In my view, the fiscal problem is one aspect of the various difficulties facing the eurozone, but it is not even the most important one. The most important is the lack of competitiveness in the periphery and the failure of the eurozone as a group to generate significant rates of economic growth.

    Without solving those two problems, the objectives of the fiscal compact will be impossible to achieve.[86]

Whilst seconding the overall view of the other two witnesses, Mr McWilliams did attribute some value to the perception the SCG Treaty creates:

    It is not a treaty that makes any difference, but that does not fully take into account the way that such things are perceived. The first is that the treaty is seen as a step in the direction of fiscal co-operation [...]. The second, which is rather more important, is that it has acted as a fig leaf that has enabled the ECB to pump a lot of money into the banking system in Europe, which has actually rather transformed the state of the world economy on a temporary basis.[87]

The only other possible benefit of the SCG Treaty drawn to our attention, in addition to a signal it might send to the markets about the eurozone's intentions for fiscal coordination,[88] is the comfort it might give to Germany in relation to a relaxation of its views on the size of bail-out funds and on Eurobonds.[89]

53.  The Minister for Europe did not dissent from the view that it was improbable that the SCG Treaty would do much to resolve the eurozone crisis, commenting that:

    I have never thought that new treaties were likely to be a silver bullet in solving the eurozone crisis.[90]

But the Financial Secretary to the Treasury nuanced that position, saying:

    Given that [the Government] would agree that an effective monetary union should be underpinned by closer fiscal integration, clearly the intergovernmental treaty has a role to play in tightening that fiscal co-ordination.

    It is a necessary step, but I do not think it is sufficient to resolve the situation. There are broader economic issues that need to be tackled within Europe to put the European economies on a much more stable long­term footing, as well as putting their fiscal position on a long-term footing.[91]

54.  We also heard some comment as to the practical difficulties of implementing the SCG Treaty.[92] Professor Hix said:

    If Governments are faced by a public and economic situation that demand they do not run a balanced budget, I can see them being under intense domestic pressure, and in that situation I just don't see Governments willing to give in to the will of either the Commission, ECOFIN or the ECJ. I can see this being a recipe for real political conflict within the eurozone.[93]

And Mr Bootle, in relation to assessing and judging a structural deficit commented:

    […] I think that it is difficult to believe that the sanctions will be imposed. There could be quite legitimate reasons for questioning whether the deficit in question was structural or not.[94]

55.  It was also apparent from various comments made to us that the SCG Treaty seems to shut off the possibility of better fiscal discipline being combined with other economic policies to stabilise the eurozone. As Mr Grant put it:

    I am worried about the economic implications of the Fiscal Compact. Clearly, I go along with the view of many analysts […] that fiscal discipline alone will not solve the eurozone's ailments and that there is a problem of a lack of growth and a lack of demand in southern Europe. This Fiscal Compact seems to essentially outlaw Keynesianism, which is not to say that fiscal discipline is not needed, but you need fiscal discipline plus efforts to promote growth.[95]

However the Financial Secretary to the Treasury thought that growth enhancing policies were possible despite the SCG Treaty. He said that:

    There needs to be a twin-track approach. Those countries with fiscal problems need to tackle them, but all countries across the eurozone and across the European Union should identify pro­growth policies. Those do not need to be policies that involve the spending of more taxpayers' money. It could be regulatory reforms; planning reforms; changing labour market laws; reprioritising spending on more productive areas of the economy; or tax reforms that favour enterprise.[96]

56.  As to what might result from the eurozone crisis if the SCG Treaty were ineffective Mr Bootle presented starkly contrasting alternatives—breakup of the eurozone or full fiscal union underwritten by a full political union.[97] Mr McWilliams, however, illustrated the large fiscal transfers between Member States a fiscal union might imply, with obvious political difficulties in gaining acceptance of such a consequence.[98] On the other hand Mr Münchau suggested that a fiscal and political union might not be necessary to solve the eurozone crisis. He commented that:

    It may be sufficient to Europeanise the banking sector of the eurozone states—it is not necessary for the non-eurozone states—to have a common deposit insurance system, a common supervisory system and, in particular, a common bank resolution system whereby a central authority could close down banks, merge banks, impose regulation. That may help stabilise the system.

    […]

    A Eurobond is possibly necessary, and common labour market rules to facilitate adjustment to make sure that labour markets respond in a very similar way may be necessary.[99]

57.  Although these witnesses did not think that the SCG Treaty had much relevance for the resolution of the eurozone crisis, they were clear that the immediate economic future for Greece, and to varying degrees for other peripheral eurozone Member States, is bleak. As for the eurozone as a whole, they saw its breakup as entirely possible. Mr Bootle took an optimistic view of this possibility:

    What would be the consequence of the break-up of the euro? I can answer with a single word: prosperity.[100]

Mr Münchau was more pessimistic, describing, by way of example, what he envisaged as consequences for Germany.[101] Mr McWilliams took a view of an initial severe downside, with recovery taking more time the longer breakdown was postponed. He opined that:

    Keeping the eurozone together compared with breaking it up seems to me to be a slightly false choice, because I think it will break up one way or another, eventually. So you will probably get two lots of costs. At least if you take the pain early, you have the prospect of trying to reform and trying to organise things for the future."[102]

In terms of wider consequences Mr Münchau suggested that a breakdown of the eurozone could mean a threat to maintaining the single market.[103] And the Financial Secretary to the Treasury simply said:

    I do not think any country would particularly benefit from the destruction of the euro.[104]

58.  It is possible that had the UK not objected, rather than the SCG Treaty, there would have been amendments to the TFEU to incorporate the requirements and sanctions of the SCG Treaty. So there would have been limitations on the fiscal freedom of the UK. Alternatively, if the Government had wished the UK to accede to the SCG Treaty, there would also have been limitations on the fiscal freedom of the country. However, neither of these scenarios is the case. So our concern is only with the consequences for the UK of not allowing TFEU amendment and not being party to the SCG Treaty. In particular: has the UK's negotiating weight in the EU been lessened; is there a danger of the participants in the SCG Treaty caucusing in considering draft EU legislation to the UK's disadvantage; and is there a danger that the SCG Treaty's advocacy of enhanced cooperation might expand the use of enhanced cooperation, again to the UK's disadvantage?

59.  We heard quite differing points of view on the first of these issues. On the one hand the European Movement UK and Professor Hix did see a threat of caucusing.[105] And Mr Grant clearly thought there is a problem:

    The big danger […] is, if the British are not in the room when decisions are taken on economic policy, or even when discussions happen on economic policy, we will be unable to influence the discussions and unable to steer the argument.[106]

On the other hand the Financial Secretary to the Treasury was dismissive of this fear, noting, in relation to a recent European Council that:

    […] member states from north and south, large member states and smaller member states, and states from Eastern Europe and Western Europe […] were brought together by a shared view about the way Europe's economy should develop.

and commenting:

    I think that the philosophies that underpin the governments and cultures in [the] 17 member states do vary […] just because someone is in the euro does not mean they have to share the same view […].[107]

60.  On the possibility of a reference in the SCG Treaty to enhanced cooperation creating a danger to the UK, Professor Hix explained why it is a major concern for him.[108] However, the Minister for Europe argued strongly that the danger did not exist, holding that the TFEU rules on enhanced cooperation were paramount.[109] And his view was seconded by the Financial Secretary to the Treasury.[110]


86   Q 107 Back

87   Q 110 Back

88   Q 108 Back

89   Q 51 Back

90   Q 144 Back

91   Q 207 Back

92   Ev w3, para 7 Back

93   Q 7 Back

94   Q 115 Back

95   Q 51 Back

96   Q 239 Back

97   Q 118 Back

98   Q 122 Back

99   Q 119 Back

100   Q 124 Back

101   Q 124 Back

102   Q 124 Back

103   Q 124 Back

104   Q 223 Back

105   Ev w1 and Qq 35-38  Back

106   Q 50 Back

107   Qq 236 and 237 Back

108   Qq 36-39 Back

109   Qq 182-186 Back

110   Q 248 Back


 
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Prepared 3 April 2012