The euro before the British

Europe feels that it is being bullied by financial markets. The forces of global capitalism, which the West unleashed through its neo-liberal policies, are coming back to haunt it. You reap what you sow.

... our fiscal sustainability has come to depend on economic growth- Joseph Vella Bonnici

The EU leaders have been meeting regularly over the last two years to come to grips with the euro crisis. Each of their summits was meant to send a strong message about the stability of the euro to financial markets.

The “fiscal compact” (which replaces the stability and growth pact) has been brewing for a while.

Germany, which, two years ago, enshrined an obligation to limit fiscal deficits in its Constitution, has been insisting that eurozone countries do likewise so as to commit themselves to fiscal discipline.

The fiscal compact envisages also quasi-automatic penalties and fines for those countries breaking the rules. Angela Merkel is adamant that the path towards fiscal union is irrevocable (Wall Street Journal, December 15).

The markets do not seem convinced.

The major credit rating firms are not making matters any easier for the EU by indicating that they will be reviewing the rating of all the eurozone countries.

The euro continues to lose ground as Europe prepares itself for another recession.

Whatever the short-term economic cost, Germany is determined to put in place the foundations of the fiscal union, possibly by early next year. Greater fiscal coordination within the eurozone is a must for the currency.

The worrying question is whether Germany is insisting on a remedy which, given its socio-economic dynamics, may work well at home but is not so appropriate for some other EU member states. Is it a one-cure-for-all that fails to give sufficient consideration to differing social, cultural and economic realities? This is reminiscent of the West’s approach to “development” economics that has now been discredited.

The UK realised that fiscal harmonisation can only be achieved through a further transfer of power to the EU. Changes to the Lisbon Treaty are necessary if EU institutions are to take responsibility to ensure that member states comply with the new regulations. David Cameron, who recently faced a major rebellion within his own party over the future of his country in the EU, sought to negotiate the reopening of the Lisbon Treaty by asking for safeguards for the UK’s financial industry.

This immensely irritated Nicolas Sarkozy who felt that the British Premier was hijacking the summit and insisted that there was no room for concessions to the UK. British-French relations are fast deteriorating, with deep rooted rivalries being rekindled.

During the October summit, President Sarkozy had advised Mr Cameron to shut up as “we are sick of you telling us what to do” on the euro (The Telegraph, October 23). This time, Mr Sarkozy was caught on camera ignoring Mr Cameron and avoided shaking hands.

Getting no comfort, Mr Cameron accused the French of intransigence, of having ulterior motives and vetoed the reopening of the Lisbon Treaty.

Subsequently, Josè Manuel Barroso argued that accepting the UK’s demands would have jeopardised the single market (BBC, December 13).

The summit was insensitive to Mr Cameron’s request.

The UK’s financial services sector is bigger than the rest of the EU’s combined and accounts for 10 per cent of GDP, 11.2 per cent of tax receipts and generates an annual trade surplus for Britain of over £35 billion. But Mr Cameron’s real concern was his knowing that it would be practically impossible for him to have any changes to the Lisbon Treaty ratified by the House of Commons.

The British and the French have a different vision of Europe.

Mr Sarkozy dreams of deeper and broader unity while Mr Cameron envisions a loose, single-market confederation. Perhaps, both acknowledge that a two-speed Europe is unavoidable and see themselves leading the respective factions.

President Sarkozy has been shrewd to fly on the wings of the German eagle. Chancellor Merkel does not seem to mind as long as she calls the shots, even though Germany wishes closer links with an EU-committed UK so as to curtail French exorbitance.

Still, on that fateful December night, Mr Cameron found himself alone. As a Bild headline put it, the EU leaders deemed that “the euro is more important than the British”. Mr Cameron became the black sheep of the EU, out to spoil the party. Back home his popularity soared.

The story is bound to go on. Will Europe see sense and come to some sort of compromise or will Britain continue to drift apart? Will the UK reconsider its veto or will the 26 EU states be obliged to create a separate “inter-governmental” treaty? Will every EU member state get the proposed treaty ratified by its Parliament without the need of holding a referendum?

Time is of essence as the financial markets will not wait for too long.

Malta forms part of the story too. Despite all the government’s rhetoric, our public finances are in a bad state. Recently, the government acknowledged that the cumulative debt of the public sector stands at 86.6 per cent of GDP.

Few public assets remain that can be sold to lessen this debt. Fiscal discipline is most welcome. Yet, our fiscal sustainability has come to depend on economic growth.

Ms Merkel’s fiscal union presents a serious threat to our economy.

Malta successfully exploited fiscal jurisdiction to compensate for its peripherality and lack of business sophistication. It is of comfort that our major political parties are aware of this fact.

fms18@onvol.net