Tuesday, 20 March 2012

What is the Fiscal Compact: Smoke & Mirrors

As the flames from the latest round of rioting in Greece die down, the incapacity of the mainstream media to tell the story of the current Eurozone crisis leaves us as much in the dark as before the Molotov’s lit up the nightly news.
 
Much of last year was taken up by endless rounds of Euro chiefs crisis meetings, followed by announcements that this time they had fixed the problem. Each announcement caused a brief market rally before, a few weeks later, another crash as the traders discovered that the politicians hadn’t really fixed anything at all.

That cycle came to an end in early December last year when the latest Eurocrisis meeting announced a new device, a “Fiscal Compact”, that was going to fix things for good this time, honest. Since then, the recurring market crises seem to have gone into remission a bit. So what is the Fiscal Compact and how has it calmed the markets?

The first thing to understand is that the announcement of the Fiscal Compact is not what’s calmed the markets. What really poured oil on the troubled waters was the decision by the European Central Bank to extend a practically unlimited supply of 3-year loans to all the private banks in the Eurozone.

Effectively the ever-shortening cycle of Euro-summits and subsequent crashes had led to a semi-hidden crisis in the interbank lending market amongst European banks. This was the same unwillingness of banks to lend to each other that triggered the global crash of 2007-2008, but on a European level. By the end of 2011 it had become clear that the Euro interbank market had more or less seized up. Hence the ECB’s sudden drastic move.

The whole Fiscal Compact announcement, then, was mostly a smokescreen to cover this emergency move by the ECB. As to what it is, it’s basically the old Stability and Growth Pact (SGP) on steroids. The SGP said that countries should not exceed 3% of Gross Domestic Product in annual budget deficit and not exceed 60% of GDP in total accumulated debt. The Fiscal Compact wants to repeat this, but then make it even more stringent by reducing the annual deficit from 3% to 0.1%, and that each Eurozone country has to write this so-called “debt brake” into their constitutions.

A number of observations of why this is stupid, hypocritical and entirely unable to prevent a re-occurrence of the crash that has plunged us into this crisis have already been made by commentators across the political and economics spectrum. But they bear repeating. 

Firstly, until the crisis, Ireland was running a budget surplus, so locally this measure would not have helped avoid the crisis then, nor will it in the future. Secondly, the first country in the EU to go over the SGP’s 3% deficit limit was Germany, so they have a blatant neck to blame the crisis on poor fiscal management by other countries, such as Portugal, Italy, Greece, Spain and Ireland. Thirdly, all but the most delusional economists agree that while avoiding government deficits in a period of growth is a good idea, trying to cut the government deficits that arise naturally during a crash, due to loss of income tax and increased unemployment costs, is the quickest way of turning a recession into a 1930s style depression. 

For that last reason, most balanced budget statutes implemented around the world provide for exceptions to the “no deficit” rule during recession. However the Fiscal Compact does not do this. It pays lip service to the issue by stating that it is the “structural” deficit that is targeted, rather than the actual current deficit. But how to calculate the difference between the two has never been established by any agreed formula. In practice the current deficit is always treated as if was the same as the structural deficit by right-wing politicians demanding cuts. Hence the decision whether a country’s current deficit is structural or merely “cyclical” comes down to politics. Given past Euro experience that means whether the country in question is Germany or France, or rather a “peripheral” country instead.

So what happens next? The immediate question facing us is whether this Fiscal Compact needs to be put to a referendum in Ireland. Clearly the Compact is utterly incapable of preventing future crises and could potentially make them worse, depending on the power dynamics around whether it is used by the Franco-German core to force disastrously destructive policies on smaller Eurozone countries. So for a country like Ireland to vote for the Compact is akin to turkeys voting for Christmas. 

The lack of any positive side to the Compact is why the stick of withdrawing bailout funds is now being threatened. But the truth of the matter is that the existing bailout is for the benefit of the bondholders, not the population. In that light, the central struggle for people to defend their livelihoods and the future of their children is to throw off the yoke of alien debt that the bank bailout has placed on us. In that struggle, the referendum is a sideshow, because what matters is forcing a default on this illegitimate debt and the way to do that is through mass non-payment of the new taxes and tithes the troika and the Irish capitalist class is trying to hang around our necks, starting with the Household tax.