LSE - Small Logo
LSE - Small Logo

Keith McDonald

October 2nd, 2015

Fiscal compact treaty adds to chaos in Europe – Robert Wade

0 comments

Estimated reading time: 5 minutes

Keith McDonald

October 2nd, 2015

Fiscal compact treaty adds to chaos in Europe – Robert Wade

0 comments

Estimated reading time: 5 minutes

Robert Wade’s recent letter to the Financial Times highlights an overlooked ‘shock’ that is negatively affecting growth prospects in Europe.

September 29

Sir, Wolfgang Münchau discusses five shocks hitting Europe simultaneously: refugees, eurozone periphery debt, the global economic downturn, Russia’s aggression in Ukraine and Volkswagen’s crimes and misdemeanours (“Five concurrent crises push Europe into the realm of chaos”, Comment, September 28).

Europe is juggling five simultaneous crises, all unforeseen shocks in different stages of development: refugees from Syria, eurozone periphery debt, a global economic downturn, Russia’s annexation of Crimea and its aftermath, and Volkswagen’s crimes and misdemeanours

My reading of the situation is that the refugee crisis, perhaps more than any other single event, will end up reducing Germany’s room for manoeuvre. But it is not the only factor. A further constraint is the global economic slowdown. Its impact on the eurozone is not visible now, but that might soon change.

Wolfgang Münchau

Euro GrexitMissing from this list is a shock of another but equally important kind, which tightly constrains Europe’s ability to cope with several in Mr Münchau’s list. It is the Treaty on Stability, Cooperation and Governance, otherwise known as the fiscal compact treaty, signed by the eurozone states in 2012.

The treaty commits eurozone members to balanced budgets (the structural deficit not to exceed 0.5 per cent of GDP), public debt less than 60 per cent of gross domestic product, automatic penalties for non-compliant states and supervision by the European Commission. It thereby tightly restricts the fiscal policy space of member governments, which have already given up national control of interest rates and exchange rates.

The treaty is a recipe for a Doomsday Machine, continually generating recessionary pressure. No economic theory or empirical evidence justifies it. The stronger European states want it as an excuse to avoid taking the essential but politically unpopular steps for making a robust monetary union — a sizeable common budget and resource transfers to lagging areas; and they sold it cynically under the headline of “strengthening co-operation”.

Until the provisions of the treaty are reversed and a sizeable common budget and resource transfers introduced, the eurozone is likely to suffer recurrent recessions, making Mr Münchau’s shocks all the worse. This scenario provides good grounds for threatening a British exit from the EU. A serious threat of British exit might provide sufficient shock for European leaders to rethink the basic architecture, as the threat of a Greek exit obviously does not.

Professor Robert Wade

Robert H Wade

Professor of Political Economy,
London School of Economics, UK


Related Posts

Euro Currency (Image credit: TaxRebate.org.uk via Flickr)Alexis Tsipras speaking at the LSE in 2013Canary Wharf, Isle of Dogs #8, by Veronica Aguilar, via Flickr: https://www.flickr.com/photos/lynsey_wells83/9228222263/ [Licence: CC BY-NC-ND 2.0]

About the author

Keith McDonald

Posted In: Featured | Topical and Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

RSS Justice and Security Research Programme

RSS LSE’s engagement with South Asia

  • Exporting Talent, Importing Cash: Nepal, Youth Migration and Remittances
    Labour migration from Nepal to various countries has reached its highest historical levels in recent years, leading to huge foreign remittance inflows into Nepal’s economy. While this has its obvious benefits, Aashiyana Adhikari looks at the complex impact of large scale youth migration from rural areas to urban/foreign destinations on the economy and Nepalese society.   […]
  • Climate Change and Women’s Unpaid Labour in South Asia
    In this short personal post, Marzana Kamal asks a series of important questions that connect women’s domestic work, care duties and work conditions with social norms, global climate change and its impact — especially in Bangladesh, and developing countries.   In the summer of 2023, I was visiting home in Dhaka. Summers are the hottest months in South […]