Cause and Effect in European Politics and Law

A Pact so difficult to describe

Adelina Marini, March 24, 2011

Another summit of European Union leaders is starting this afternoon in Brussels. If one is not attentive with the numbers might be left with the impression that the member states leaders since October go from Council to Council, trying to solve a complex task, the parameters of which are as the same, so they are constantly changing. And if in the beginning (October) eurozone member states' wish was for more tight financial and economic discipline, under the diktat of France and Germany, now the discussions' flow receded back to the channel of "community approach".

In the afternoon the leaders of the 27 will discuss again the Union's economic governance with the newly crystallized Pact for the Euro that replaced the much tighter Pact for Competitiveness. It was designed for the euro area members but as the debt crisis in the Monetary Union goes beyond it, the option was envisaged non-euro countries to be able to join too. This additionally diluted the discussions because, practically, from voluntary the membership in the Pact turned into obligatory, especially for those who aspire for eurozone membership. This is why the latter have started to table conditions.

And so, several hours before the beginning of the European Council Bulgaria announced that it would join the Pact but under a condition. Before the National Assembly Prime Minister Boyko Borissov announced that Bulgaria would insist to defend its tax policy and more precisely - to keep its 10% corporate tax. Thus, our country stands beside Ireland who, however, is under a serious pressure to increase its corporate tax (currently 12.5%), at least because the country is already consuming the EU and IMF bail-out.

Having said Ireland, on the eve of the summit John Bruton (a former premier of Ireland and ex-ambassador of the EU to Washington) wrote several recommendations to the heads of state and government of the EU. In order to defend better his thesis, Mr Bruton recalled major points in the Pact for the Euro: reducing labour costs in countries with competitiveness problems; decentralising wage bargaining; opening up professions and energy networks to competition; lowering the costs of legal systems; raising the retirement age; introducing a fiscal board (constitutional/legal limit on government borrowing); instituting a single, consolidated base for corporation taxation.

According to the former Irish premier, most of the proposals are good, especially those related to the hardly won stronger role and monitoring responsibilities of the European Commission. The rest, however, John Bruton writes in a publication for the American think-tank Carnegie, are misguided, especially that for the creation of a consolidated tax base. The author quotes calculations of the Ernst & Young company, according to which a single tax base would increase Irish firms’ tax compliance costs by 13 percent - at a time when they can hardly afford them.

According to another research, quoted by John Bruton, though the single base would increase the tax revenues of larger countries, it would decrease those of smaller peripheral countries, thereby worsening their relative debt repayment position.

And another thing, which is important for Bulgaria: the former prime minister of Ireland deems that the constitutional limit on government borrowing could also backfire, devolving into a political game with lawyers in the centre. Such a measure could work if carefully designed, with room left for dealing with emergencies. Public debt must remain a priority of the eurozone, especially given the high levels of debt of some countries and also given the prospective cost of aging societies.

What is missing in the Pact for the Euro?

John Bruton thinks that there are several missing elements, which could be essential to fixing the Economic and Monetary Union (EMU) system. The first and most important thing, in his words, is the creation and application of effective punitive measures. "Peer pressure alone will not work: small countries may submit to big countries, but the process can fall apart in reverse, as when attempts to apply the Stability and Growth Pact to Germany and France in 2004 failed". The former Irish premier supports the opinion, shared many times by many with regard to the Stability and Growth Pact, that imposing fines on countries with excessive deficit would not be enough.

Moreover, in some countries like Ireland, the expansion of private-sector credit - not government debt - was the primary problem, and that requires its own set of penalties. In order penalties to make sense, the European Commission and the European Central Bank must be involved by endorsing a strategy for regular briefings with the rating agencies and all political parties in the member states.

John Bruton's second recommendation is EU leaders to get back to the issue about the weaknesses of the banking sector. Unless Europe restores its banking system, confidence will not return to the markets, small businesses will not thrive, and credit will be too scarce to tackle large structural problems.

European banks have to be recapitalised, is the third measure of the former Irish premier, because of their interdependence. The most important, however, he underlines, is Europe to create a banking policy. This is a logical consequence of the first stage of economic and monetary union, but it is not being tackled in any of the papers from German Chancellor Angela Merkel, French President Nicolas Sarkozy, or the EU institutions.

A major element of such a banking policy must be tackling of various difficult questions, varying from interconnectedness to "too big to fail". A problem, for the resolution of which an attempt has been made with the creation of the structures for financial supervision in the European Union, of which euinside wrote in details.

And last but not least, the EU must swear off the institutional rivalry that occasionally characterizes it and instead confront problems honestly. Ireland’s debt crisis, for example, is not purely an Irish problem; the Irish are not solely to blame, and relying on Irish taxpayers to help stabilize the European banking system blinds Europeans to lessons that must be learned at the broader level, too. Of course, he adds, Ireland - and other weak Eurozone members - must address their weaknesses, but the EU must also work together toward practical, imaginative solutions if it is to avoid similar crises in the future.

It is not clear to what extent these ideas of the long-term diplomat would be taken into account but the agenda of today's summit appears to be tough. Except the Pact for the Euro the leaders will tonight discuss the completion of the first phase of the European semester (the annual surveillance of budgetary policies and structural reforms), enhancing economic governance, banking sector health and the completion of the work on the creation of the permanent stability mechanism

Over dinner the leaders will discuss the situation in Libya and the crisis in Japan.