Not quite like striking gold

The Prime Minister lost no time in presenting to the House of Representatives the first reading of a Bill to amend the Constitution to incorporate the decision taken by eurozone leaders last week to embed a provision to ensure that national budgets are balanced, the so called Golden Rule. The rule is a rallying cry of the German Chancellor, Angela Merkel, to instill fiscal discipline in member countries to avoid repetitions of the financial crisis that has gripped Greece and ricocheted into the heart of the eurozone despite umpteen efforts to stall it, thereby to make it more possible for her to engage in rescue operations.

The rule, which same are saying will make Keynesianism illegal, is an important concession of fiscal sovereignty from a government that is firmly against fiscal harmonisation. It is a step into the “German” camp. This is a national issue. At first blush that is how it was treated in our House of Representatives. The Labour leader said the opposition would support the Bill in the national interest. He pointed out the obvious – that without the support of the opposition the government would not be able to entrench the far-reaching fiscal provision in the Constitution. (Entrenchment requires a two-thirds majority.)

Opposition support would be given though this would technically be a Money Bill. The opposition leader could not help taking a dig at the Prime Minister, reminding him that the government could not muster a majority of elected MPs on the opposition’s recent motion of no confidence.

Underlying agreement on the Golden Rule was not enough to have, for once, a reasoned bipartisan discussion on what is essentially a technical issue which will bind either side when it is in government. All hell broke loose after the opposition leader’s dig, with the Prime Minister immediately mounting a high horse to accuse the opposition with all sort sorts of renegade behaviour.

And so it goes on, instead of both sides preparing an early programme of explanation to the people at large about the implications of the rule. For, implications there definitely are. I have already indicated one of them – loss of sovereignty.

Malta, like various other member countries, opposes the German drive towards fiscal union. That would be tantamount to taking fiscal decisions completely out of the hands of the Finance Minister and his national government.

As Malta found out, there is already some encroachment in that area. It goes beyond the much-abused Maastricht condition for structural deficits not to exceed three per cent of GDP, a condition which was first allowed to go with the wind by Germany and France. Through a recent revision the EU is empowered to oversee national budgets, at time with striking consequences.

That was seen recently when, barely two months after our Finance Minister presented, and the House approved, the estimates of income and expenditure for 2012, the government was made to lop off some €40 million of approved expenditure.

It was a humiliating, if bracing experience. Humiliating, because the EU compulsion surfaced after the estimates were approved. Bracing, because it demonstrated that national finance ministers were now subject not only to budgetary oversight, but also to overrule.

Another implication of the Golden Rule is that effective limitation on finance ministers will now become automatic, reducing their ability to use fiscal policy to the full to attempt to regulate the economy.

Setting aside the persevering tendency for governments to run deficits the Budget is an important counter-cyclical fiscal tool, all the more so other tools – such as an exchange rate change – are taken out of the hands of national governments in a currency area such as the eurozone.

It remains to be seen how the Bill will detail the Golden Rule once published. Whether, for instance, the rule will apply over a period as a moving average, to allow finance ministers some policy leeway necessary during economic activity downturns. Without that the rule would be too rigid. Yet there is no doubt that a very strong measure of rigidity will be built in, for that is the whole purpose of the rule. It is intended to make finance ministers and their government realise that fiscal policy – in the annual budget or outside it – should not be used as a political tool, such as to splash out as an election approaches.

That is a tactical constraint. The Golden Rule also has a strategic objective, which is to make finance ministers cut the budgetary suit according to the availability of the resources cloth. Under the rule governments will have to prioritise spending more than ever before. In good time the warnings repeatedly given by former Central Bank Governor Michael Bonello will come to bear on Budget balancing policy.

Budgetary constraints definitely imply a loss of sovereignty and a weakening of policy tool. Hopefully, the Golden Rule will also introduce a gain in fiscal and political responsibility.