THE LATEST VERSION OF THE EURO AREA FISCAL COMPACT-WILL IT BE ENOUGH TO SATISFY THE ECB TO DEPLOY THE NECESSARY FIREPOWER?

On the basis of the  agreement at the EU Summit on 9 December, the EU is working out the details of the proposed fiscal compact which will be incorporated in a Treaty between EU members, except the UK. The latest version has been published on the Open Europe website and is herewith.

My own view is that something solemn and strong, along these lines, is needed if sovereign borrowing by European states is to regain the confidence of the markets. This a vital national interest for all euro area member states, notably for Ireland. So the Treaty must  pass. But we must also make sure it is as well designed as possible.

A few questions need to be answered.

1.)    Will this Treaty need to be put to a Referendum in Ireland?

When Ireland joined the United Nations and the IMF, no referendum was needed, even though in the former case Ireland theoretically could have been, or be,   committed militarily,  in  defined circumstances, which have not  in fact yet arisen.

One of the provisions in the Treaty , would commit Ireland to introduce a balanced budget rule into its legal system in a  binding and permanent way, preferably in the national constitution.

 A constitutional amendment would definitely require a referendum. But an amendment to the Central Fund Act or some other piece of “permanent” financial legislation, to impose a balanced budget policy, would not require a  referendum.

I wonder if  that would be sufficient?

2.)    How easy will it be to interpret is the proposed compact?

If the wording of the proposed Treaty is to subject to adjudication by the European Court of Justice and, in Ireland’s case, by the Irish Supreme Court it needs to be very clear .

The Treaty would allow a country to have a structural deficit of up to 0.5% of GDP , “in terms of the country specific medium  term objective” for that country. That objective would presumably be set by the Commission.

 Interpreting administrative objectives set by the Commission would be difficult for Courts.

Furthermore, the concept of the structural deficit itself is quite elastic. It depends on the point a country is on in its economic cycle. But there is often controversy even among top economists about when an economic cycle began or ended, and even about whether there is such a thing at all. This will bring judges into very difficult areas in which they have little expertise.

There is also a question about how binding these rules will be. A rule in Ireland’s constitution is much more  severe, than rules in constitutions in other countries, where the constitution is  seen as guidance, rather than absolutely binding regardless of circumstances

3.)    Does the compact do everything that needs to be done?

My own sense is that there is not enough in the draft Treaty about how Europe is to regain competitiveness and market share.

 This means bringing downs costs, in the way Germany did in the 1990s and Latvia did more recently. Fiscal austerity is necessary, but not sufficient, to achieve this.

Austerity is not an end in itself. It is only a means to an end, and that end needs to be more credibly and clearly defined by the Heads of Government of the Euro area.

TWO BOOKS WORTH READING.

One of the most original books I read in the last year was “American Nations, a history of the eleven rival regional cultures of North America” by Colin Woodard, a journalist living in Maine.

The thesis of the book is that  the first European settlers in a given part of the continent established the  prevailing  cultural and political norms for the  area and that subsequent immigrants, even those with  very  different ethnic and religious backgrounds,  adopted the  norms of the  original settlers. Although the original settlers may have arrived 400 years ago in different parts of  North America, their norms  can, Woodard argues, be seen in the  voting patterns of different  parts of North America to the present  day.

 During my  five years as an Ambassador in the United States, I  spent a lot of time studying the  voting patterns of  different states and reading American history, and I have to say I find Woodard’s thesis to be fully borne out by my own observations.

Among the eleven “nations” he identifies are

an internationalist one around New York city, which still has the internationalist bias of its original Dutch settlers,

a Yankee nation in New England and a northern belt going west to Chicago, which is influenced by the Puritan and statist ideas of the original settlers of New England

an Appalachian culture which is deeply suspicious of all authority in church or state

a culture of the  Deep South influenced by slavery and its resultant  class  distinction

an Hispanic culture that  straddles the US /Mexican border

Power in the United States is influenced by the shifting of the alliances between these  different “nations”.

Another very interesting book I have just completed is “Lloyd George and Churchill, Rivals for Greatness” by Richard Toye.

Churchill and Lloyd George were both Ministers in the last single party Liberal Government to hold office in Britain. It held office from 1906 until it split, and was overthrown, in favour of a National Government headed by Lloyd George during the First World War

Churchill and Lloyd George were both deeply distrusted by their Ministerial colleagues, who saw both of them as too clever by half. They were, and remained, close political friends, but were rivals as well. They did not always speak well of one another in private.

Until the 1920’s, Lloyd George was the more successful of the two. He also had more innovative thinking on economics in the 1930’s.  Churchill had a better understanding of the threat posed by the rise of Hitler. When Churchill became Prime Minister in 1940, he wanted to bring a then elderly Lloyd George into his Government, but the latter was pessimistic about Britain’s war prospects and did not take up the challenge.

2012...A HAPPY BEGINNING

Finola and I had some very good news during the autumn of 2011, the engagement of our  eldest daughter, Juliana, to  Maxence Dubois.

Max’s family live in Lyon in France and both Juliana and Max work now in London. They met originally when they were both students in Dublin City University (DCU).