The suspension of the rule of law in the euro zone and why Chancellor Merkel should not place her trust in rules. Part 2.

In the second of two posts, Dr Gunnar Beck examines the apparent suspension of the rule of law in the EU as countries seek to remedy the eurozone crisis.

In matters of fundamental state and party political interests, government disrespect for legal and constitutional niceties are commonplace and, it cannot be said too often, is in no way confined to the EU. There are many historical examples of states which have wonderful laws and a woeful record of compliance with them – the Soviet Union, Southern Italy, Greece, or many Latin American countries provide obvious examples. Even in the United States a highly developed legal system co-exists quite happily with some features of a banana republic, such as open electoral fraud in presidential elections, blatant corruption, grossly unequal access to justice, and (extra-territorial) human rights abuses. And Britain has long operated an image of public probity and rectitude which ingeniously disguises often unaccountable and invisible state and secret service action and an ancien régime based on a system of taxation where practically anyone who earns more than £100,000 including senior civil servants escape the official tax rates applied to the less well-paid, and where investment bankers and almost anyone with serious money can avoid paying income tax altogether as soon as they bother to engage a tax accountant. In situations where double standards and ‘official’ violations of the law are disguised by complication, lack of transparency and glossed over by xenophobia and delusions of political self-righteousness, they will not necessarily, and certainly not quickly, erode public confidence political stability and even a general tendency to rule-following and respect for the law.  The problem with ongoing breaches of the rules governing the euro zone is that the rules are straightforward, the breaches obvious and credible official denial and effective obfuscation practically impossible.

Much more worrying in terms of the crisis at hand, however, than the gradual erosion of  public trust and confidence in the EU project by government and EU institutional disregard for the Union’s own rules, is precisely the persistence, at least for the crucial time being, of too much trust and misplaced confidence in promise-keeping and rule-following amongst German politicians. Chancellor Merkel has insisted time and again that further German help must be conditional on the tightening of existing rules combined with additional safeguards and promises of more stringent budgetary controls by the weaker euro zone countries. To ensure that in future the economic policies of the other euro zone countries are sufficiently in line with the refined Maastricht criteria, the fiscal compact – a separate treaty negotiated between 25 of the 27 EU Member between December and January 2012 – introduces several exacting criteria to ensure budgetary discipline which go considerably beyond existing requirements:

  • General government budgets shall be balanced or in surplus. The annual structural deficit must not exceed 0.5 percent of GDP. Countries with government debt levels significantly below 60 percent and where risks in terms of long-term sustainability of public finances are low, can reach a structural deficit of up to one per cent of GDP.
  • Member States will transpose this requirement into their national legal systems at statutory level or higher.
  • All signatory states recognise the jurisdiction of the Court of Justice  of the EU to verify compliance with the new budgetary rules and their transposition of this rule into national law.
  • Government whose debt exceeds the 60 per cent reference level shall reduce it at an average rate of one twentieth (5%) per year as a benchmark.
  • The Court of Justice may fine Member States operating an excessive deficit or in breach of other requirements of the fiscal compact the equivalent to up to 0.1% of GDP. The money would go either to the ESM (if a Euro country is fined) or to the general EU budget (in case of fines imposed on non-euro zone signatories).
  • If a country is recognised to be in breach of the three per cent ceiling under the SGP or in excess of the 0.5% structural deficit, the Commission shall submit proposals for the adoption of appropriate counter-measures.

The fiscal compact is being sold to the German electorate as providing not only for tighter fiscal discipline but a stricter monitoring and enforcement mechanism not available under the SGP or the EU Treaties. Such promised are questionable. The Court of Justice can take action only at the instigation of a Member State after a proposal submitted by the Commission. If the Commission decides not to kick start the process, or no government initiates proceedings, no action will be taken against the delinquent Member State.

Indeed, under the fiscal compact the Commission is to assume the central monitoring role. As soon as a Member State is recognised to be in breach of the 3% ceiling, the Commission is to submit a proposal of counter-measures detailing the necessary structural reforms to contain the fiscal imbalance. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council. The Commission is also to chair regular eurozone meetings throughout the year. Under the existing Treaties the Commission is assigned the role as the ‘guardian of the treaties.’ And yet, despite widspread disregard for the eurozone rules the Commission has not taken action even once in the face of nearly 100 or more flagrant treaty violations. Often the Commission applauded, rather than criticised, the ECB and the Member States for joining forces in dismantling both the no bail-out clause and other key stability provisions.

In essence, the Fiscal Compact provides very little that was not previously contained in the Maastricht criteria. If the latter had been complied with it the present crisis could not have occurred. It is already clear that most eurozone members will not be able to meet the additional stability criteria either in 2013 and 2014. The current economic, the prospect of low growth for years, and Germany’s apparent willingness to bail out the indebted countries, suggest there may be no such prospect for many years. The European Stability Mechanism, which is the carrot of the twin package to which the Fiscal compact is the stick, has been designed for the purpose of providing financial support under strict contingency for eurozone governments in financial distress and no other purpose. The ESM was designed to come into force on 1 July 2012 or as soon as possible thereafter once it has been ratified by the necessary number of eurozone members. It was broken even before it could come into force when, at their meeting of 28/29 June, the eurozone leaders agreed that the fund should likewise be used to prop up and refinance dozens of distressed banks in Italy and Spain without any additional conditions attached, in flagrant violation of Article 3 ESM Treaty. The Fiscal Compact and ESM Treaty will start life just as the SGP with its convergence criteria had done a little over a decase ago: with a cavalcade of treaty violations.

Germany’s political establishment is committed to keeping the euro afloat by imposing German-style financial probity and prudence on their brethren in distress. Outside Germany, Max Hastings recently suggested[1], practically no one believes this idea can work in practice. Sure, Hastings writes, the Greeks, Italians, Spanish and Portuguese will agree to anything to get cheques issued by Berlin. But who seriously believes that these nations’ finance ministries will henceforward submit to permanent German audits. It is bizarre, Hastings concludes, that Germany’s chancellor Angela Merkel, a clever politician, sets such hopes on getting her European partners to sign agreements they are quite incapable of keeping, and which Germany herself may not be able to honour. There is, of course, another, more plausible explanation. Merkel has no illusions whatever in this respect, but she knows, and has been rather unsubtly persuaded by her G7 colleagues, that nearly seventy years after the end of WWII Germany is still not yet accepted as a sovereign nation with the freedom to pursue her own economic interests.

2 thoughts on “The suspension of the rule of law in the euro zone and why Chancellor Merkel should not place her trust in rules. Part 2.

  1. Pingback: Regeln und Grenzen

  2. Lieber Herr oder Liebe Frau Huett

    Das haben Sie schoen kommentiert, richtig zsmfasst und im uebrigen praegnant und stilistisch gut uebersetzt. Herzlichen Dank, Gunnar Beck

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