Our loss of economic sovereignty may be just the beginning

EUROPEAN DIARY:THE BERLIN "leak" of Irish budget details may well go down in history as the moment when the true extent of the external intrusion in domestic affairs came into view. It doesn't make it any less unsavoury to say something like this was probably inevitable, but it is as well to acknowledge reality.

"We have, it's true, lost our economic sovereignty as we cannot [alone] form government policy without co-ordinating it with the EU, the IMF and the ECB," Taoiseach Enda Kenny told the Frankfurter Allgemeine Zeitungnewspaper last week.

The Taoiseach was speaking the evening before German MPs took it upon themselves to divulge part of his budget to the world, which rather proved his point. In all likelihood there will be much more economic co-ordination – at an increasingly radical level – even after Dublin finally shrugs off the yoke of the bailout programme.

Plans for a eurobond system, in which single-currency countries issue debt with a common guarantee, include measures which would see recalcitrant countries put into some form of European “administration”. In this world, the EU authorities would have powers to curtail national expenditure to ensure eurobonds and their associated interest are fully repaid.

Germany remains opposed to eurobonds. It is possible, nevertheless, to see moves to deepen and toughen European oversight in the budgetary arena as a drive to create the conditions in which Berlin comes on board eventually, albeit reluctantly.

For countries like Ireland, which are still coming to terms with the strictures of life in the bailout zone, this heralds a far-reaching new order which will severely restrict freedom of manoeuvre in national economic policy. Whether that proves acceptable politically remains to be seen, but the debate in Brussels and beyond is moving rapidly.

Already this year European law has been strengthened to allow sharper EU scrutiny of national economic policies and swifter sanctions against persistent rule-breakers. These measures remain mostly untested for the moment, yet moves are afoot to go further still.

Tomorrow, the European Commission publishes a long- awaited paper on eurobonds or, as it prefers to call them, stability bonds. The wags in Brussels are already calling them “Barroso bonds”, after the president of the commission, José Manuel Barroso, and “Olli bonds”, after European economics commissioner Olli Rehn.

No matter how the German debate evolves, it is clear that any move to permanently spread fiscal risk in the euro zone would have to be accompanied by a more thoroughgoing form of economic co-ordination and integration. With that in mind, the commission paper includes a swathe of proposals to deepen the reach of existing governance measures. The EU executive wants member states to move soon to a system in which they adopt a common budgetary timeline and a new degree of monitoring of EU budget recommendations.

In addition, it says euro zone countries “should be subject to enhanced surveillance when it is experiencing – or at risk of experiencing – severe financial disturbance, with a view to ensuring its swift return to a normal situation and to protecting the other euro area member states against possible negative spillover effects”.

While these arrangements go only so far, the commission says a considerably higher degree of intrusiveness would be required to buttress a eurobond system. “In line with currently discussed changes, this would entail more thorough examination of draft budgets, not only for fiscally distressed countries but for all participating member states,” says a draft of the paper.

“EU approval of budgets could be needed for participating member states under certain circumstances such as high indebtedness or deficit levels. Moreover, a much stronger monitoring framework of budgetary execution would be required.”

There is more, for the commission says interest payments must be sacrosanct.

“One option to this end would be to grant extensive intrusive power at EU level in cases of severe financial distress, including the possibility to put the failing member state under some form of ‘administration’,” it says.

“Another option . . . that would perhaps less infringe on national sovereignty would be to introduce a clause for participating countries on seniority of debt service in the stability bonds system over any other spending in the national budgets. Such rules would need to have stringent legal force, presumably at constitutional level.”

It is high-minded, tough stuff, which raises abundant questions of democratic legitimacy and the limits of national prerogatives.

Still, moves to advance the interventionist cause are seen as the only way to foster any kind of long-term stability for the single currency. Quite how this co-exists with day-by-day political reality can only be guessed at.

The resignation of Willie Penrose shows what happens when Cabinet members get jittery over the fiscal outwork of the Government’s European policy.

Keeping everyone on board for much more of the same in a post-bailout scenario would be all the more testing.