The EU Fiscal Compact

Philip Arestis and Malcolm Sawyer, guest bloggers

The European Leaders agreed in principle at their meeting in Brussels on the 8th/9th of December 2011 to adopt tougher sanctions on the euro area countries that break the ‘new’ rules of what used to be the Stability and Growth Pact (SGP), what is now called the ‘fiscal compact’ (FC). The FC requires that tax and spending plans be checked by European officials before national governments intervene. There will be automatic actions against those countries that are deemed to have budget deficits that are too large. In effect the new agreement tightens the rules of the old SGP, but with no apparent improvement, as the FC retains the principles of the previous SGP but with the one addition that breaking the deficit rules may actually be punished in some way.

The limits of the fiscal compact (as in the SGP) are in effect to balance overall budget over the cycle and limit the national budget deficit in any year to a maximum of 3 per cent of GDP. Under the fiscal compact the 3 per cent limit is retained, and the balanced overall budget is formulated as ‘structural budget’ to not exceed 0.5 per cent of GDP, and this is to be written into national constitutions or equivalent. In place of the previous threat of a 0.2 per cent of GDP ‘fine’ for exceeding the 3 per cent limit (though never implemented even though there were 40 cases where the 3 per cent limit was breached), there will be automatic consequences, including possible sanctions, unless a qualified majority of euro area countries is opposed.

It is readily apparent that the ’fiscal compact’ does nothing to address the perceived problems of national governments with large budget deficits, which cannot be funded through capital markets, except insofar as it somehow changes the European Central Bank’s attitudes to directly or indirectly funding those deficits. More seriously it does nothing to address the major problem of the Economic and Monetary Union, namely the large current account imbalances – ranging from a surplus of 7 per cent in the case of Germany to deficit of 10 per cent in the case of Greece (figures for 2010).

Read the rest of this entry »

Spotlight Durban: An Island Nation’s Call For Gifts to the World

His Excellency Anote Tong, President of Kiribati
Another in a Triple Crisis and Real Climate Economics Blog series on the Durban Climate Change Conference.

Earlier this fall, I crossed the Pacific Ocean from the island nation of Kiribati, which I am privileged to serve as President, to visit the United States.

In the days just before the tenth anniversary of the terrorist attacks of September 11, I saw and heard many references to the “resilience” of the American people. President Obama spoke of it, the covers of magazines displayed it. There is no doubt that Americans have found within them the capacity to absorb tremendous shocks, to adapt and heal from unimaginable disaster.

I listened as my American hosts spoke about your economic challenges. I understand that the hardship in your country is great. I heard of many people who are jobless, “underwater” on their home loans, and struggling to make ends meet. I know the deep insecurity that many of you feel.

These same ten years have brought another sort of disaster to my country, a constellation of low-lying, reef-fringed islands scattered across 1.3 million square miles of the South Pacific. On average, our islands are just two meters above sea level. Scientists anticipate sea level rise of one meter or more as a result of climate change within this century. You begin to see the catastrophe that Kiribati faces.

Read the rest of this entry »

Spotlight Durban: National Interests, Ethics, and Climate Change – Don’t Listen to (Most) Economists

Julie Nelson, Guest Blogger
Another in a Triple Crisis and Real Climate Economics Blog series on the Durban Climate Change Conference.

What are the ethical responsibilities of sovereign nations? How can we expect nations to behave, in regards to climate change? We often hear that  nations will inevitably try to shape policy in ways that serve their own interests, where “interests” are largely defined in terms of short-run economic growth. Yet, if every nation sets this as a goal, we are—to use a particularly apt colloquialism—cooked.

I’m afraid that economists are particularly to blame for this perverse framing of the issue. In the economics mainstream, people are thought of as autonomous individuals who are driven by a desire to maximize their own levels of personal satisfaction.  Sociality,  care, ethical responsibilities, and environmental impacts are not part of the story. The insistent teaching of this approach over the last century or so has led many people to believe that selfish and even opportunistic behavior is simply “natural” or “standard” in commercial life—and therefore both excusable and unavoidable. A number of scholars of economics, law, and politics have extended this approach to thinking about governments, considering states as simply  “economic man” writ large.

Read the rest of this entry »

Spotlight G20: G20 commitments to tax and development: a progress report card

David McNair, guest blogger, part of our 2011 Spotlight G20 Series

Back in September I was sitting in the salubrious office of an official from one of International Financial Institutions – when he slouched back in his chair, sighed and said ‘I can’t even bear to read those G20 communiqués – they are so vacuous.’ That evening, I found myself at a dinner hosted by DC law firm Jones Day where former Mexican President Zedillo branded the G20 ‘a disappointment.’

But last week Christian Aid welcomed the G20’s bold pronouncements on tax havens, financial transparency and development. President Sarkozy went as far as to say that havens that didn’t comply would be excluded from the international community. A whole programme of work on tax and development was agreed.

This was a major coup for organisations like Christian Aid and the Tax Justice Network that just three years ago were struggling to garner political support for these issues.

Read the rest of this entry »

Spotlight G20: Avoiding a European Nightmare: Combining Structural Adjustment with an Effective Social Protection Floor

Louka T. Katseli, guest blogger, part of our 2011 Spotlight G20 Series

While markets expect eurozone leaders to exercise effective leadership and take action to resolve the eurozone’s sovereign debt crisis, citizens in peripheral European countries are trying to make ends meet under drastic cuts in wages and pensions, rising taxes and massive layoffs.

While the public debate and the media focus their attention either on European banks and their recapitalization needs or on the planned rescheduling of private bond holdings and the future capital needs and powers of the European Financial Stability Facility– the euro zone’s rescue fund– the anxious voices of impoverished families in Greece, Ireland, Portugal , Italy or Spain are not even recorded.

While the future of the euro hinges on the collective capacity of member countries to safeguard financial stability and avoid further contagion, the future of decent jobs for young Europeans is under threat, fueling massive protests by angry youth in most European countries.

While talks in academic circles focus on the exigency of further deepening European integration via a fiscal union, European solidarity and the legitimacy of the European social model are questioned in the streets and squares of several European capitals.

Read the rest of this entry »

Spotlight G20: The rules of austerity are still marked by a double-standard ideology

Bhumika Muchhala, guest blogger, part of our 2011 Spotlight G20 Series

Yet again, the G20 Summit, held in Cannes last week, yielded insipid communiqués that merely rehashed past commitments, outlined policies the G20 countries are already doing, and reiterated the EU’s party line to assuage markets on the eurozone debt crisis.  The FT reports that the G20 has once again proved meager results despite lofty promises, casting its own irrelevance against the gloomy realities of the world economy.

Drawing a parallel between the ineffectual coordination in the G20 forum with that of the EU’s internal faultlines and lack of democratic policymaking, analysts have remarked that the G20 is a microcosm of the multitude of global malaise: persistent imbalances, the failure of democratic and collective action, and the lack of structural reforms.

At the core of the G20’s macro-policy agenda is an elite consensus that there is too much sovereign debt in the world and so governments have to reign in public budgets through fiscal austerity.  As both Paul Krugman and Gerry Epstein have pointed out, this was the case in last year’s Seoul summit, which called for ‘fiscal consolidation programmes’ in developed countries despite massive levels of unemployment.

Read the rest of this entry »

Spotlight G20: Who Calls the Shots on Food Security?

Frequent Triple Crisis contributor Sophia Murphy analyses the G20’s chilling effect on strong initiatives at the UN level to address food security issues, in a new commentary from the Institute for Agriculture and Trade Policy. It builds on Jennifer Clapp’s recent blog post and the recent interview with Clapp and Timothy A. Wise:

ROME, OCTOBER 2011 – Multilateralism is in crisis. It is perhaps most evident in the painful and truly frightening failure of governments to come to grips with the implications of climate change. But it was also evident on a much less well-publicized stage in mid-October in Rome, where governments were gathered at the U.N. Committee on Food Security (CFS) to discuss food price volatility…

Read the full commentary.

Spotlight G20: Emerging Economies Join G20 Coalition to Tax Speculation

Sarah Anderson, guest blogger, part of our 2011 Spotlight G20 Series

Talk about piling on. Bill Gates, the Pope, the Archbishop of Canterbury, 1,000 parliamentarians, 1,000 economists, the world’s major labor leaders, Occupy Wall Street protestors, Oxfam and other major development groups, thousands of nurses, the World Wildlife Fund and other major enviros, Michael Moore… It might be easier to list who didn’t come out in support of a Wall Street tax in the lead-up to this week’s G20 summit in Cannes.

The outcome?  No home run, but some measurable steps forward.

No one expected a G20-wide agreement on taxing financial transactions at this summit.  Despite rising support, opposition from the United Kingdom, Canada, and the United States, among others, is still just too strong.  But there were high hopes that a subset of European and non-European G20 countries would launch a “coalition of the willing” in support of the tax.

This goal was achieved.  In his concluding press conference, summit host French President Nicolas Sarkozy announced that South Africa, Brazil, and Argentina were joining the list of current supporters, which inlcude France, Germany, Spain, the European Commission, and several other European governments.  Sarkozy said he hopes to move towards implementation in early 2012.

Read the rest of this entry »

Spotlight G20: The G20 and the New World Order

Sarah Anderson, guest blogger, part of our 2011 Spotlight G20 Series

Signs of a New World Order are everywhere here in the French Riviera, as the elite city of Cannes hosts the G20, the ultimate elite club. The local business rag, the Riviera Times, trumpets a recovery of the tourism business during the 2011 summer season – thanks to a 50 percent increase in visitors from China.

In my hotel lobby there are stacks of China Daily, but no such freebies from the newspapers of the Old World Order powers. Walking by the kiosks, though, I see European headlines rejoicing at the likelihood that China will aid in the Greek bailout. The head of the European Financial Stability Facility, the pot set up to rescue basket case countries, traveled to Beijing last week and rattled a tin cup for donations from China’s $3 trillion reserve fund. This comes amid news that Chinese investors have acquired distressed Swedish carmaker Saab. (They already own Volvo.)

How will China’s juggernaut status affect the G20’s agenda?  In both positive and negative ways, in my view. On the positive side, they could hold some of the other governments’ most extreme free market tendencies in check. Take, for example, some of the positions the Obama administration is pushing in bilateral and regional free trade agreements. In the recently signed treaties with Panama and Colombia, they pushed through new rules that ban the use of capital controls, despite the fact that many countries are using these policy tools to combat financial volatility and the International Monetary Fund is recommending them in certain circumstances. The Chinese government, a capital controls user, would never go along with it if the Obama administration tried to push such nonsense at the global level.

Read the rest of this entry »

Spotlight G20: Brazil in the G20 Meetings

Adhemar Mineiro, guest blogger, part of our 2011 Spotlight G20 Series

The meeting in the beginning of November will be somewhat of a new experience for Brazilian partners in the group. In all previous meetings Brazil was represented by President Lula da Silva and Foreign Minister Celso Amorim, who both had not only experience and inclination for the discussion of international issues, but also high profiles and proven leadership capacity in this kind of meeting. In the next meeting Brazil will be represented by President Dilma Rousseff and Foreign Minister Antonio Patriota, two newcomers with low profiles in general.

On other side, the international economic crisis remains the main problem on the agenda: the G20 as a group has a quite insurmountable problem. Besides its old problem of scarce or nonexistent legitimacy stemming from the idea that a small group of countries cannot represent the whole world, the G20 now faces a new issue. After its three year existence, and despite the use of available resources and political will, the group was unable to overcome the financial and economic crisis and find a new development path. In other words, it is not only the G20’s legitimacy that is now in question, but its ability as well.

Read the rest of this entry »