LEADERS of the European Union agreed to create a new whip to discipline any member state that is fiscally irresponsible and 25 EU countries nodded their approval to the pact while two said no. If ratified by the 25 countries’ parliaments, quite a few EU countries could feel the sting of the whip if they do not manage to bring their future budget deficits below 3 percent of GDP. The exact mechanism for assessing and enforcing penalties has not yet been agreed.
Prime Minister Iveta Radičová was optimistic about the outcome of the January 30 summit, which as well as the budget discipline pact considered ways of addressing high levels of youth unemployment across the EU. She noted that the EU leaders had endorsed all the points first laid out at their summit last December.
“It ultimately turned out better than I had expected; 25 countries is a strong result,” the prime minister commented.
Though the summit did not produce a specific penalty mechanism for violators of the budgetary discipline rules, Radičová said it would consist of more than member countries merely pointing fingers at each other.
“The agreement is that part of the process of ratification in the [national] parliaments will be a very clear procedure and an institution that will have authority to turn to a court [the European Court of Justice],” Radičová stated, as quoted by the SITA newswire.
Financial analysts and economists appear divided over the usefulness of the fiscal compact but the chief economist for Volksbank Slovensko said its key importance is in strengthening the credibility of the euro without actually creating a federal fiscal union.
EU countries will be expected not only to follow strict fiscal rules but also to incorporate the principle of a balanced budget into their basic legislation. The pact also restricts countries from accumulating debt beyond normal public administration, such as for public-private partnership projects, and includes a duty to report plans to issue state bonds.
The two countries that declined to join the pact were the United Kingdom and the Czech Republic. Radičová does not believe the Czech Republic’s decision not to sign the agreement is its definitive stance, saying that Petr Nečas, her Czech counterpart, was responding to the current political situation in his country and that he had not ruled out the possibility of endorsing the pact at a later time, SITA reported.
Although Greece’s financial problems were not among the primary topics at the summit, Radičová said on January 30 that she had personally rejected the possibility of increasing the amount of the second aid package for Greece, which was set last fall at €130 billion.
“I think we have all reached a ceiling and that it is not possible to endlessly proceed in this way,” Radičová stated. “It creates a large burden for particular countries.”
The prime minister also expressed no support for the idea of establishing a commissioner to watch over the Greek government’s budget, saying this would create an institution beyond current European treaties, the TASR newswire reported.
Vladimír Vaňo, chief economist with Volksbank Slovensko, told The Slovak Spectator that the reaction of the financial markets to the summit was quite positive, noting that the euro’s value against the US dollar had reached its highest level in seven weeks, at $1.32 to €1. Vaňo commented that the euro had appreciated 4.7 percent against the dollar since mid January and had erased one-third of its fall recorded in November and December.
“Delivering on the promise from the Merkel-Sarkozy summit and reaching an agreement on the wording of the new fiscal compact by the end of January is certainly a very crucial component in the process of rebuilding confidence in the markets,” Vaňo stated.
Vaňo added that adopting the strict fiscal coordination rules that were approved by all 17 eurozone countries as well as by eight EU states not in the eurozone underlines that protection of the common currency is important for the entire EU.
“The so-called fiscal compact is an arrangement of very tight and enforceable fiscal coordination rules, but without creating a common ‘federal’ fiscal policy like in the US. As such, the fiscal compact is aimed at increasing the resilience of the eurozone against the effects of future recessions without having a joint federal fiscal policy,” Vaňo explained to The Slovak Spectator.
When asked about the possible impact that stricter fiscal discipline might have on economic growth in the EU, Vaňo said that given the harm inflicted over the past three years by the sovereign debt problems of peripheral eurozone members on the credibility of the entire zone, rebuilding market confidence and making the eurozone more resilient during business cycles should take priority over any “growth stimulation”.
“Moreover, the two most important elements of a sustainable solution to the eurozone sovereign debt crisis are fiscal reforms and structural economic reforms,” Vaňo stated. “These are much more important to foster long-term growth potential than the slight, short-term negative effect of fiscal austerity that is inevitable to keep the eurozone afloat.”
European leaders also agreed that the European Stability Mechanism (ESM), the permanent bailout scheme, will roll out one year earlier than planned with an effective lending capacity of €500 billion. On February 1 Slovakia’s cabinet agreed to back the revised version of the ESM, requiring the country to contribute €659.2 million to the ESM in five installments over a five-year period. The cabinet proposal still requires approval by parliament.
The chairman of Freedom and Solidarity (SaS) party, Richard Sulík, objected that he did not believe the cabinet had a mandate to take that decision.
The ESM will be established in mid 2012. In contrast to the European Financial Stability Facility (EFSF), which was based on collateral provided only by individual eurozone countries, the ESM itself will have total subscribed capital of €700 billion, with €80 billion in the form of paid-in capital and €620 billion in committed accessible capital. Slovakia is responsible for €5.768 billion of the subscribed capital, TASR reported.
