Thursday, 3 May 2012

The Fiscal Compact - crisis resolution?

Tom McDonnell: Sebastian Dullien has a useful piece on the Fiscal Compact over at the Social Europe Journal.

Sebastian correctly argues that none of the Fiscal Compact rules will make a direct impact on fiscal policy for at least half a decade. In part this is because most countries are already in an Excessive Deficit Procedure (EDP) agreed with the European Commission. Ireland’s current EDP ends in 2015. The Stability and Growth Pact and the Six Pack, rather than the Fiscal Compact, are driving the current austerity.

And the austerity itself is a major part of the problem. The cumulative effect of each Euro zone country accelerating the austerity drive is a recipe for prolonged stagnation and high unemployment across the continent. Sebastian calls for a longer adjustment period, a reorganisation of public investment financing with the European Investment Bank playing a central role and a move towards euro-bonds or some form of European debt redemption fund.

One hopeful sign is that Francois Hollande is evidently calling for the ESM to be given a banking licence. See here.

Germany will resist. Hollande’s success or failure on that issue will go a long way to determining the outcome of the crisis. With a banking licence the ESM (or indeed the EFSF) could perform real time unlimited Lender of Last Resort functions. Without such an institution in place it is difficult to see how the Euro can survive in the long run.

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