Democracy in Europe, Part n

For those who still have the patience—or the sick curiosity—to follow Europe’s parody on democracy and the rule of law, it’s been a fascinating few days.

Forget Greece and Portugal:  fiscal consolidation in Spain and Italy isn’t going particularly well, either.  In both countries, the lack of progress has a great deal to do with fiscal federalism’s pathology—i.e., the tendency of junior government to rack up debt and to gamble on a federal bailout. (I’ve droned on about that unfortunate tendency in a series of earlier posts.) In Spain, the regions (which account for the lion’s share of the Country’s excess debt) seem to be winning the game of chicken: the already-bankrupt government in Madrid is sending money their way, in return for empty promises. My buddy Alberto Mingardi’s terrific piece on the Italian situation appears here.

The EU is hardly an innocent bystander. For decades, it has been buttering up regions financially as well as politically, on the theory that what’s bad for nation-states is good for the EU and to the point where it’s hard to explain why Spain or Belgium still exist. They are the functional equivalents of insolvent pension funds with a colorful flag and a Chairman who answers to “His Majesty.”

Meanwhile in Ireland, a country that still aspires to being one, the government’s legal office has ruled that the EU’s Fiscal Pact will require a popular referendum, the fifth on an EU instrument in a decade. Voters rejected the Nice Treaty and the Lisbon Treaty before accepting both in a second vote. This time is different, though. The Nice and Lisbon revisions still acknowledged that treaty changes require the unanimous consent of all member countries; Ireland’s “no” votes threatened to derail the entire project. Not so now: the Fiscal Pact/Treaty is motoring along without the participation of England and the Czech Republic.  (I’ve explained here why this is illegal.) But it gets better, or rather worse: Art. 14(2) of the “Treaty” provides that it will go into effect as soon as 12 of the 17 euro-zone countries ratify. The only effect of an Irish “no” would be to exclude the country from receiving bailout funds from the European Stability Mechanism (ESM), which it may need (again).

Buried in the treaty provisions is another howler: under the ESM’s “emergency” procedure, financial assistance requires an 85% majority of voting rights, which are allocated in proportion to countries’ financial contributions to the ESM. This means that France or Germany alone could veto a bailout or, more likely, condition it on Ireland’s surrender of its low (12.5%) corporate tax rate, long a scandal to more enlightened countries . Not that Monsieur Hollande or Frau Merkel would contemplate such a maneuver. Ever.

Speaking of Germany, the Federal Constitutional Court dinged another keep-the-EU-humming contrivance, the StabMechG, or the statute implementing the ESM. (The German summary of the decision appears here (link no longer available); a press account in zee English language here.) Under the FCC’s well-established jurisprudence, the legislature can’t delegate its budget authority wholesale to EU institutions. This means, inter alia, that disbursements from and other major decisions by the ESM (or its current teenage incarnation, the ESFS) require parliamentary consent. Under the StabMechG, the 620-member Bundestag had cleverly delegated that authority to a nine-member committee, meeting in secret. Recent events illustrate the reason: due largely  to the FCC’s earlier preliminary injunction against the arrangement, the legislature had to vote on the Greek bailout. Chancellor Merkel’s coalition suffered embarrassing defections, and the measure passed only with the opposition parties’ support. Now that the Court has permanently enjoined the mini-committee (except for certain emergency ESM measures requiring secrecy), prepare for a running, open conflict between the Chancellor’s personal popularity (70%-plus approval) and the voters’ overwhelming opposition to further bailouts (60%-plus).

Reader Discussion

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on March 17, 2012 at 22:08:59 pm

Could I add another entry to the blog wollofing my preceding comment? My most serious concern about the European Stability Mechanism is that the UK is contributing tens of billions of pounds to this fund when there is no long term plan for the weaker members of the eurozone. There is a very strong argument for Greece specifically, and probably all the PIIGS countries, reverting to their own currencies. Inside the eurozone Greece will be condemned to years, perhaps over a decade, of austerity. Outside it could immediately realign its currency with the euro to re-establish its competitiveness. Its experience would almost certainly be similar to that of the UK when it left the ERM in 1992. That is not to say leaving the euro would not be a difficult process with problems both for Greece itself and for other EU countries, whether in the eurozone or not. Just that remaining in the euro would be even more difficult and painful.Most economists believe that Greece and probably the other PIIGS countries should never have entered the euro in the first place. Many, perhaps even a majority, believe that the quicker this mistake is ‘unwound’ the better for everyone concerned. Of course, the UK cannot force this decision on the other EU countries but it can take a lead in recommending such a course of action which would almost certainly be to the long term benefit of all countries of Europe rather than what is almost certainly throwing good money after bad with the ESM and IMF initiatives.Two specific questions are:Has the FCO, possibly in conjunction with the Treasury, analysed the relative advantages and disadvantages of the PIIGS staying in or leaving the euro? If so, I should be grateful if you could point me to any documents detailing such an analysis and its conclusions. If no such analysis has been done could I ask if there are plans to carry out such an analysis and when?

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on March 18, 2012 at 14:11:27 pm

The statement that the European Stability Mechanism does not eriuqre a referendum in the UK, as it affects only the 17 countries which are members of the Eurozone is so manifestly untrue it defies comprehension and is an insult to the British People of which William Hague should be ashamed.The UK Taxpayers are having to pay billions of pounds in to funds (both directly with the EFSF and indirectly via the IMF) to support the single currency and the Foreign Office states that it does not effect the UK. If the UK's being forced to transfer billions of pounds particularly at a time of austerity in this country is not something that effects the UK then what I should like to know what is.

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