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Materially, compared to the declaration made in December, only two things stand out in the latest treaty draft: First, there are no provisions for automatic sanctions. And second, the treaty draft allows countries to deviate temporarily from the requirements of having their budgets in balance or in surplus in case of an “unusal event outside the control” of the government concerned or “in periods of severe economic downturn”.
So, is this a big deal, as [ECB board member] Asmussen was claiming? The answer depends on where you see the origins of the crisis. If you believe that the current crisis is caused by irresponsible governments having always spent too much and taxed too little and if you believe that some European governments will always try to break any rule designed to limit their deficits, use all their powers in Brussels to get around sanctions and any possibility to cheat around fiscal rules, then this change might make a difference. Even the small changes then might have opened a possibility to run higher deficits than it would have been the case with an even stricter treaty. If these possibilities then are systematically exploited over years, possibly the debt level in the end would be higher than with a stricter rule.
If you believe in contrast that at the bottom of the crisis was at least in some countries a boom and bust cycle, a real estate bubble and a banking crisis which let tax revenues plummet and government expenditure rise as the economies were pushed into recessions, then it is hard to see why the current deviation in the treaty draft from the initial promises should be a problem. The recession in Ireland and Spain were so deep and the deficits suddenly so large that no constitutional rule and no treaty provision would have been able to prevent those deficits. Macro-economically, it just would not have been possible to bring down the deficits quickly to the balanced position. Among macro-economic practitioners, it is common knowledge that there is only so much of a government budget balance you can correct in a given time frame without inflicting serious harm to the economy. The only effect stricter rules and sanctions would have had on a country like Spain is that they would have added insult to injury. Automatic financial sanctions would just have burdened the budget when public finances were already strained from the recession anyway. Even with constitutional amendments and EU treaties, you just cannot legislate away macro-economic realities. So, one could even argue that the current wording makes the treaty more sensible than the prior promises as it at least introduces a little bit of flexibility into an overly inflexible austerity pact.
In the end, however, these small details will be completely irrelevant in solving the current euro crisis. The problem at the moment is not that countries are reluctant to cut their deficits decisively enough. The latest rating downgrades were not justified by insufficient cuts in government spending or insufficient tax increases. In contrast, S&P specifically made references towards the unfavourable economic outlook, the deepening recessions in the euro periphery and the inappropriate exclusive focus on austerity. Without growth, debt-to-GDP ratios will continue to rise over the years to come. And as this “fiscal compact” will do nothing to spur the economy, but will in contrast guarantee that fiscal policy will remain adverse to economic growth at least until the middle of this decade, it will contribute nothing to a solution of the euro area’s problems.