After more than a year of “market dictatorship” that threatened to unravel the eurozone, Nationalist MEP Simon Busuttil hopes the deal concluded on Friday will “restore democracy” and solve the debt crisis.

But like other analysts who spoke to The Sunday Times yesterday Dr Busuttil was unsure how the financial markets would react to the historic agreement that called for greater fiscal integration across the EU.

In Malta the deal was welcomed by Prime Minister Lawrence Gonzi and opposition leader Joseph Muscat. In a rare moment of unity yesterday in Parliament both leaders agreed constitutional amendments should be made to enshrine the principle of balanced budgets.

Constitutional change, or the golden rule as it is known, is one of the matters agreed between the 26 EU member states except the UK.

For economist Lawrence Zammit, who has long advocated enshrining the balanced budget concept in the Constitution, the decision was a welcome move.

“This gives comfort and security because while Malta’s debt is all internal and so less problematic, others have run up massive debts with foreign creditors and the country risked being punished for matters that were outside its control,” he said.

The golden rule will establish that countries have to reduce their deficits by at least 0.5 per cent of GDP per year until they balance their budgets or achieve a surplus.

Details of how the golden rule will be applied still have to be worked out, including the exceptional circumstances that will allow countries to infringe the principle.

But Finance Minister Tonio Fenech said the underlying argument is that governments will be bound by more fiscal discipline and this will also “impinge on promises made to the electorate”.

He said Malta was already moving along the path to a balanced budget with the deficit next year forecast to go down to 2.3 per cent.

The big question mark, however, is whether the markets will be placated by the bold and triumphant statements made by bleary-eyed European leaders after emerging from the all-night summit on Friday.

The declarations were no different to those made after each and every euro-crisis summit held since Greece first needed a bailout last year.

Dr Busuttil believes the latest agreement is intrinsically different from those that came before it because it involves top-level changes to the workings of the EU and a strong political commitment to get things done by March 2012.

“This is the first time that EU members have agreed on EU Treaty changes even if the method applied is different and I expect the markets to pick this up and react well,” he said.

The summit has laid down the foundations for a fiscal union and this has important political implications because it leads to deeper EU integration, Dr Busuttil said.

“It is a pity the UK is not involved but ultimately each country has to decide whether it is in or out and that moment has arrived for the UK,” he added.

With the UK standing on its own after its found no backing from other member states, the financial markets remain the only unknown factor in the equation.

Mr Zammit quoted Italian Prime Minister Mario Monti saying “I don’t know” when asked whether the deal would calm the markets.

“Market volatility today is very much dependent on speculation by hedge fund managers and the next step should be for the EU to tighten banking regulations and avoid having investment banks causing havoc in the markets,” he insisted.

What the deal will definitely do is bring about fiscal discipline that will lead to better governance, Mr Zammit said.

“It might also force Malta to look at the cost benefit of taboo areas such as healthcare, stipends and pension reform.”

But there are other concerns, which people like John Cassar White, a business analyst, feel the deal has not addressed.

Describing the agreement as a positive development, he believes the long-term problem of slow economic growth facing the eurozone will persist.

“There is no doubt the deal is good but there is a lot of emphasis on austerity and little focus on stimulating economic growth, which is important for the eurozone to emerge from its problems,” Mr Cassar White said.

He believes there is a global shift in economic strength away from Europe and the US.

“I hope this deal will eventually lead to restructuring of the labour market and make Europe more competitive on the global stage.”

The European Commission has forecast an economic slowdown across the eurozone and some countries may even enter into a recession next year. But on the 10th anniversary of the euro’s entering into circulation, Mr Zammit does not believe this is essentially a bad thing.

“An economic slowdown will benefit countries in the long-term because along with the fiscal compact agreed on Friday it will force countries to do away with waste and make sure public funds are spent in a cost-effective manner.”

Political consensus

Prime Minister Lawrence Gonzi and Opposition leader Joseph Muscat addressed Parliament yesterday on the EU fiscal compact.

They agreed on:
• A constitutional amendment to ensure fiscal discipline but with conditions for flexibility in exceptional circumstances.
• A common EU-wide tax base is unacceptable for Malta.
• A financial services transactions tax would be acceptable only if introduced globally.
• Exceptional circumstances include those like 2009 recession when government spending increased to save jobs.
• Before constitutional changes are done the country had to wait for the parameters to be set by the European Commission.

They disagreed on:
• Whether the deal will calm the markets – Dr Gonzi believes the EU summit responds to what the financial markets are requesting, while Dr Muscat is less enthusiastic on the prospects.

The fiscal compact

• Government budgets shall be balanced or in surplus.

• The deficit principle is not breached if annual structural deficit does not exceed 0.5 per cent of nominal GDP.

• Constitutional amendment required to enshrine the deficit rule.

• The Constitutional rule will contain an automatic correction mechanism triggered in the event of a deviation.

• European Court of Justice will have jurisdiction to verify transposition of the deficit rule at national level.

• Member states shall achieve balanced budgets according to a calendar proposed by the Commission.

• Member states deemed to have an excessive deficit shall submit an economic programme to the Commission and the Council detailing the necessary structural reforms to correct the deficit.

• If the deficit breaches three per cent of GDP ceiling Commission will automatically impose sanctions unless these are waived by quali-fied majority of eurozone countries.

• Draft annual budgetary plans will have to be submitted to the Commission before being presented to national parliaments for approval.

• Debt has to be reduced to 60 per cent of GDP.

• Euro summits will be held at least twice a year.

• The European Stability Mechanism, a permanent bailout fund, will come into existence a year earlier than scheduled in July 2012.

• ESM will have a combined lending capacity of €500 billion.

• Haircuts – forfeiting money owed – by the private sector like those imposed when an agreement on Greek debt was reached in October, have been ruled out.

• Voting rules in the ESM will include an emergency procedure when an urgent decision is required on financial assistance.

• The fiscal compact will be reached by an international agreement outside the EU treaties to be signed in March 2012 with the final objective to incorporate the provisions into EU treaties as soon as possible.

ksansone@timesofmalta.com