Finance and Economy

Fiscal Compact Undermines Good Solutions to the Crisis

To implement the Fiscal Treaty would severely hamper the recovery programs that the EU needs to overcome the economic downturn. At the same time, the Fiscal Treaty further deepens social inequalities without contributing genuinely to building a European outcome to the crises.

Fiscal compact forces social inequalities

For the Luxembourg Greens, the main problem with the Fiscal Stability Treaty is its debt brake. The “Six-Pack” has introduced all other elements two years ago and the subsequent “Two-Pack” will complete in a far better way the process, which is very much needed, of coordinated European fiscal policy. But the Fiscal Treaty does not consider the revenue aspect of public budgets. It doesn’t make any progress on tax harmonisation or at least on corporate tax policies. So the fiscal effects only occur through reducing public spending. This is justified for some countries, but falls short as lone strategy when we consider the high risk of an economic downturn in the EU.

If tax competition is not strongly restricted, the debt brake will force governments all over Europe to close social welfare programs that are needed to absorb the social impact of the crises. The large number of unemployed people that we have to consider, even in Luxembourg, (where public spending in unemployment programs has nearly doubled since 2008) wouldn’t understand. And they are right.

So a debt brake without strengthening public tax incomes as the Fiscal Treaty foresees it is, from the social perspective, a highly irresponsible undertaking.

Fiscal compact is economically inefficient

It is quite revealing that four years of fiscal austerity in the crisis countries hasn’t led to any major economic recovery or even a reduction of the debt burden. No wonder! The debt brake and related severe austerity policies resulted in economies shrinking, the capacity to pay back public debt being reduced and the result is horrific both from the social and business point of view. The Fiscal Treaty, which enforces this approach, rules out any alternative and turns austerity policy into a constitutional rule. This type of economic strangulation will not lead to the expected outcome, especially in its purely fiscal dimension of the debt burden ratios.

Instead we need a strong impetus to implement the Green New Deal: investing in green infrastructure and environmental industrial transition, both based on efficiency, sufficiency, renewable resources, decent work, social inclusion, and innovation as well as training and education.

There is even no need to talk about the more technical problems linked to the fiscal treaty: how to implement a debt brake considering that there is no agreement on what constitutes a “structural deficit”. Also the very worrying prospect of the European Court of Justice fixing politics along legal rules instead of decisions taken by national Parliaments, which will not help create more support among citizens for better European coordination of tax and social policies.

The debt brake is simply economically ineffective.

A genuine European solution is on the way

Eventually, the European Parliament, together with the Commission and the Council has proven that there is no need for an undemocratic Fiscal Treaty. They agreed on the “Six-Pack” already by the end of 2011 and strengthened this three weeks ago with the “Two-Pack”. So a coordinated fiscal policy is possible without abandoning a common and progressive European dynamic.

A truly European approach would have both a minimum tax base in order to stop tax competition between Member States, especially for states that do not respect the Stability Pact, and a form of Eurobonds in order to reduce public debt in a way that reduces private speculation on public debts.

Both of these are on their way and the Commission engaged formally in establishing an expert-group to work on better European tax harmonisation and the idea of a common European sinking fund for excessive national debt burdens.

Some critical points need attention

The Luxembourg Green Party is aware that in some countries the Greens voted in favour of the Fiscal Treaty, such as in Germany. Does this mean that there is a major difference in opinions? Not necessarily. When the German Bundestag stated on the Fiscal Treaty, Merkel was clever enough to bind it with the vote on the European Stability Mechanism, for which the Greens were in favour and which was urgently needed in order to refinance the Greek Government. At the same time, Chancellor Merkel had to accept, against the strong opposition of her coalition partners the Liberals, support for a financial transaction tax at European level. With this major victory and considering the fact that a debt brake was anyway introduced in the German fiscal rules, the German Greens support for the Fiscal Treaty is not so different from the opposition in Luxembourg. We don’t see a major conflict in this regard.

In Luxembourg, the Greens are the only major party to refuse to support the Fiscal Treaty. We argued strongly on the social and economic consequence of the Treaty and highlighted the quite ambiguous position of the Social Democrats who are the junior coalition partner in government. Still, as public budgets in Luxembourg tend to be in a deficit since 2008 and as the Greens asked several times for a more sound and sustainable fiscal policy, we recognised the risk of no longer being perceived as advocates for the responsible management of fiscal affairs.

Such a risk needs to be faced with a strong position on a better, more democratic European Fiscal Policy, implemented in a way that emphasises European Solidarity among Member States instead of dividing them. Such a position is a common responsibility of the European Green Movement of which we are part and that we consider to be on the right track.

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