3 The economic and political issuesthe
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.
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.
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
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.
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.
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.
54. We also heard some comment as to the practical
difficulties of implementing the SCG Treaty.
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.
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.
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.
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.
56. As to what might result
from the eurozone crisis if the SCG Treaty were ineffective Mr
Bootle presented starkly contrasting alternativesbreakup
of the eurozone or full fiscal union underwritten by a full political
union. 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.
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 statesit
is not necessary for the non-eurozone statesto 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.
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.
Mr Münchau was more pessimistic,
describing, by way of example, what he envisaged as consequences
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."
In terms of
wider consequences Mr Münchau suggested that a breakdown
of the eurozone could mean a threat to maintaining the single
And the Financial Secretary to the Treasury simply said:
I do not think any country would particularly
benefit from the destruction of the euro.
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.
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.
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 [
brought together by a shared view about the way Europe's economy
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 [
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.
However, the Minister for Europe argued strongly that the danger
did not exist, holding that the TFEU rules on enhanced cooperation
And his view was seconded by the Financial Secretary to the Treasury.
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