Germans plan to revamp euro rule book

ANALYSIS:Merkel's call for a revision of European treaties may prove to be a step too far, writes ARTHUR BEESLEY

HAVING SET terms for the €110 billion rescue of Greece, German leader Angela Merkel is campaigning to put her stamp on a radical revamp of the euro zone’s fiscal rule book. Whether she gets her way will be a crucial test of her clout.

The chancellor is pushing an open door when it comes to tougher central governance, but her call for a revision of European treaties may prove to be a step too far. Yet, as EU finance ministers return to Brussels today for more talks on the debt crisis in the euro zone, Merkel has made it clear that she wishes to recast the euro’s fiscal rule book in the image of German correctitude.

Her proposals would break new ground in Europe by creating stiff political penalties for errant euro governments. They also raise the prospect of a sovereign debt restructuring in the single currency area, something resisted by many other capital cities and by the European Central Bank (ECB).

The meeting, to be chaired by European Council president Herman Van Rompuy, takes place against the backdrop of renewed pressure on the euro which dropped this week to its lowest levels for more than four years.

In spite of a pledge of €750 billion to shore up distressed members of the single currency and the release of a €20 billion loan to Athens, the sense remains that the European authorities have yet to lance the boil.

Merkel’s suggestion two days ago that the euro was in danger did little to instil confidence. It was the same for her unilateral ban on speculative dealing in certain financial stocks, a manoeuvre that mystified some of her European colleagues and angered others.

This adds tension to the proceedings today, which centre on proposals to deepen economic co-ordination throughout Europe and intensify budgetary surveillance. In normal times this would be one for specialists who get their kicks from the fine-print aspects of economic governance. In the current maelstrom, however, it’s a battle ground in which Europe’s grand powers are vying for supremacy in the creation of a post-crisis rule book.

This is no theoretical debate. The outcome will have particular implications for the citizens of the 16 euro zone countries as it will determine how their governments balance the books for years to come.

A cardinal lesson from the Greek debacle is that the rules enshrined in the EU’s Stability and Growth Pact proved woefully insufficient to prevent a toxic combination of poor financial management, deceitful statistics and debt addiction from spinning out of control. The consequence was threatened contagion, frantic efforts by European governments to create a safety net for all members of the single currency and a rush to austerity in Spain and Portugal.

The result of these disturbing events remains to be seen. Merkel speaks in portentous terms of an existential test for the euro and unpredictable risks for Europe. Even while they fight fires in the markets, however, EU leaders are trying to rebuild the currency system from within by reinforcing the rule book.

First out of the traps came the European Commission, which called last week for new powers to review draft budgets in Brussels before they go to national parliaments. Now come the Germans, with their own set of demands. As the biggest contributors to the Greek bailout and the biggest guarantor of the wider rescue scheme, they cannot be ignored.

At the very least, therefore, the wishlist that finance minister Wolfgang Schäuble presents in Brussels today will be core to the reform effort.

The nine-point plan, set out in no more than three pages, would significantly restrict the fiscal wriggle room that used to be a feature of euro zone governance.

Berlin wants a “leaner-meaner” stability pact. This would include faster sanctions against governments that break the rules, a focus on state indebtedness and leverage in the governance system to allow a more “open-ended” discussion on a country’s prospects.

The plan calls on the European Commission to be more direct in its routine assessments of the member state economies, and says the ECB should carry out a parallel examination of their fiscal position. The plan also says that national parliaments should be brought into this process, saying the parliamentary prerogatives should not be undermined.

So far, so sensible. Where the plan turns controversial is with the sanctions mooted for countries which consistently violate the 3 per cent budget deficit limit set down under the pact.

Though sanctions would not be automatic, Berlin says they should include, in the first instance, a suspension of EU structural funds.

If high deficits imply fiscal pressure, the drawback in the suspension of structural funds is that it could worsen a country’s economic position. The same concern surrounds the second-stage sanction: the cancellation of structural funding rights.

However, it is the third and fourth-stage sanctions that are most controversial. For countries who refuse or cannot quickly make fiscal amends there would be a suspension of their voting rights when EU finance ministers meet.

This would require a change in the EU treaties, something many states oppose for fear of opening the floodgates to demands for reform across the board.

In Dublin there is no appetite for yet another European referendum. The same goes in London, where newly-installed prime minister David Cameron does not want to have to come good on his promise to put any treaty change to a referendum.

The Berlin plan also calls for the development of a mechanism to allow a euro country to enter an “orderly national insolvency”. This puts debt restructuring on the agenda, something few governments want to contemplate for fear of prompting panic in sovereign debt markets.

While the key word in the Berlin proposal is “orderly”, avoiding disorder in any national insolvency would be exceptionally difficult in a currency union such as the euro.

Even now it is safe to say that Schäuble will not receive an easy hearing for the final two sanctions.

The German authorities vigorously deny that Merkel’s deep reluctance to intervene in Greece magnified the debt crisis. In the face of stolid resistance from Paris and the ECB, remember, she secured IMF involvement in the rescue plan and intensified demands for austerity from Athens.

The Germans also ranked high among the EU states who spurned the commission’s demand for new borrowing powers in any new general rescue fund.

Whatever the ultimate parameters of the new rule book, Germanic rigour may soon guide budgetary policy throughout Europe.

That Berlin, alongside Paris, was a prime mover in the drive to water down the Stability and Growth Pact five years ago is another matter entirely.

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