Central control of the euro zone is being spoken about because of Greece and Ireland
AFTER A period of extended confusion, Europe’s institutions and member states finally moved last weekend to safeguard the euro zone – and this initiative seems to have been successful. Nevertheless, by their fiscal irresponsibility during the present decade Ireland and Greece together seem to have undermined confidence in a European monetary zone continuing to operate successfully without a measure of central control over national budget balances.
Under the scheme suggested by the European Commission, each euro zone member would have to submit its annual “budget orientation” to scrutiny by its 15 euro zone partners, and if they determined that these budget proposals could damage the euro, that state would be required to modify this outline budget.
The commission has made it clear that its concern is with the “aggregate stance” of national budgets – viz the level of deficits and borrowing – and not with individual components of taxation or expenditure.
Nevertheless, such a move, presumably under article 136 of the Lisbon Treaty, would represent a major, and for many member states unwelcome, change in the balance between the European institutions and EU states. So, Ireland and Greece will certainly not be thanked for having, by their fiscal indiscipline, sparked off this commission initiative. In the tense atmosphere created by our earlier mishandling of our finances, our Government has wisely been careful about how it has reacted to this commission move.
There may, however, be some technical problems with implementing such a scheme, for it is not clear that the commission at present has sufficient capacity to model national economies accurately enough to be able to propose appropriate modifications to their budgetary balances and borrowing policies.
When, in the 1990s, the prospect of a single European currency emerged, the potential advantages of this were clearly huge – especially for a country like Ireland, which, as recently as January 1992 had been forced into a major devaluation. Ireland, one of the most open economies in the world – exporting the equivalent of 80 per cent of its GDP – was naturally attracted to participation in a stable currency zone with other European states it had trading links with.
Before the establishment of the euro zone, fears about inadequate control over national budget deficits had been greatly eased by the positive budgetary performance of its potential members during the mid-1990s, when every one of the candidates for euro zone membership reduced its published budget deficit to less than 3 per cent of national output. That remarkable performance encouraged a general belief that, despite the lack of central budgetary control, self-discipline at the level of member states would ensure the single currency would succeed.
However, the Greek statistics which had appeared to show that country to have been getting its finances in order in the mid-1990s, turned out to have been misleading; Greece had instead persisted with overspending thereafter, as well as with failing to collect much of its tax revenue.
Ireland was a somewhat different case. What happened here was that a change of government in 1997 led within a couple of years to the sudden abandonment of the fiscal responsibility that had been such a striking feature of the 1990s. Between 2000 and 2002 minister for finance Charlie McCreevy doubled the rate of increase of current public spending, which, in a country then experiencing full employment, inevitably stimulated an increase in prices and wages almost 2½ times greater than in the rest of the euro zone. During the immediately preceding nine years from 1993 to 2001 our share of the volume of advanced countries’ exports had actually doubled, but between 2002 and 2007 the 15 per cent loss of competitiveness brought about by the McCreevy inflation, led to a dramatic reversal of that process, involving an actual fall of one-fifth in our export share. The damage done to our economy included the unnecessary loss of almost 20,000 jobs in exporting industries, plus many thousands of consequential job losses in other sectors.
Within five years of that debacle we faced in addition the collapse of our housing bubble, which had been fatally stimulated by irresponsible government incentives. And this led in turn to the collapse of our banks, adequate regulation of which the government had failed to ensure.
As early as 2002 it was already clear things were going very wrong. In this column in April 2002 – on the eve of the second-last general election – I was already expressing alarm at the state of the government’s finances – which among other things reflected the consequences of cumulative overspending of €1.25 billion by Brian Cowen in health and Micheál Martin in education, together with a €2 billion overestimate of tax revenue by McCreevy.
In that article eight years, ago I warned that “we could rapidly get into very difficult territory indeed. It would not take much further uncontrolled spending to bring us close to the [Stability and Growth Pact] deficit figure of 3 per cent”. And I added: “We find ourselves precariously placed financially just as we are approaching the end of the present pay agreement, at a time when our inflation rate is already higher than anywhere else in the community, with fresh pay claims and benchmarking awards imminent, and with public service pay already absorbing one-third of public spending.
“We shall have to abandon the illusion that, whilst keeping our tax level below that of every other western European country, we at the same time can increase public service pay all around, reform our health and education services, house those who cannot afford to house themselves, and provide childcare services for all who seek them.”
Regular readers will recall that throughout the following five years I returned to this theme more than a dozen times, but to no avail. Nobody in politics, and almost no media commentators, seemed to be listening and we did not abandon our illusions until after two successive general elections.
“Whom Zeus would destroy, he first drives mad,” as Sophocles said.
It seems to me that during much of the past decade Zeus must have been engaging very actively with the sanity of our people, our media, and our politicians!