France and Germany have agreed in Deauville to propose that the EU Treaties be amended to provide for the sanction of withdrawal of voting rights in the EU, from countries whose Government budgets exceed EU deficit or debt limits. I believe there is a better, and less cumbersome, way of getting the same result.
It is not clear what voting rights Germany and France propose to take away. Would it only be votes in the Finance Ministers Council? Or would they take away voting rights in all Councils of Ministers formations and in the European Parliament as well? Any voting right disqualification provisions would radically change the democratic nature of the European Union and would thus require an amendment of the European Treaties, and probably referenda in a number of countries because of their nature.
In return for this under the Franco German proposals, a system for giving conditional financial aid to countries in the euro zone , who find themselves unable to get out of financial difficulties of their own accord, and who could not borrow from the bond markets, would be introduced as a permanent feature into the European Treaties. This would, in effect, make the European Monetary Fund, which now exists temporarily and whose mandate will expire just before the next German Federal elections are due, a permanent feature. It would also satisfy the German Constitutional Court, which is careful about extensions of EU competence without explicit authorisation. It is understandable that Germany would want some assurances before it could agree to this treaty revision, but one must ask whether a withdrawal of voting rights is the best card to play.
A system, which would allow countries to renegotiate or reschedule their debts with their creditors in an orderly and EU approved way, is also being considered. This would have considerable merit. It would make the markets more wary of lending money to countries whose finances were unsound because it would create the possibility that careless lenders to Governments might not be repaid in full.
There are also proposals on the table to impose fines on countries whose borrowing and debts are seriously above EU limits. Some argue that such fines should be automatic. Others say that there should be a margin for political judgement as to whether to impose a fine in a particular case.

A number of questions have to be asked about these various proposals.

1.) Do they address the real problem?

It is true that many European countries now have a big Government finances problem. But, with the exception of Greece, their present Government finances problem does not have its source in the Governments own finances as such, but in a private sector credit bubble. In the case of Ireland, for example, the problem was an explosion in private sector credit which first overwhelmed the banking system, and which is only then dragged the Governments finances down too. A disciplinary system focussed on the Government finances alone, as this proposal does, is likely to miss the target, because it will be triggered too late. Private sector credit developments, and losses in competitiveness need to be covered by the disciplines. The European Commission attempts to deal with this by its excessive imbalances procedure, which addresses wider imbalances in a member states economy. But this will involve making fine judgements about what constitutes an “imbalance” and that may not easily lend itself to being an adequate legal basis for fines or voting right sanctions .

2.) Will the proposal on voting right withdrawal ever be accepted and brought into force?

All 27 countries will have to ratify it if it is to become part of the EU Treaties. It is easy to see where objections might come from. A country, which was still bound by EU decisions and required to contribute to the EU budget, but which had no vote in those decisions, would be in the position of being a sort of EU colony. I do not think there is much chance that all 27 countries, particularly smaller ones, will be easily persuaded to accept that possibility as proposed by France and Germany. Using up political capital on a proposal which has only a small chance of being accepted in the end would be politically unwise

3.) What sort of assumptions would be used in making these decisions?

The ratio of a government’s deficit to its country’s GDP is a relationship between three variables,….revenue, expenditure and GDP….. all three of which are highly unpredictable and uncertain. Making assumptions about the future growth of GDP, and even about the present size of GDP, are hazardous exercises. The size of GDP in a given year often has to be revised a few years later when more information comes in. The French President himself has pioneered studies to devise a more accurate measure of welfare than GDP. Basing a decision to remove voting rights from a sovereign state on the basis of this ratio between three uncertain variables would be a very messy legal process. So also is imposing fines on that basis.

4.) Will the proposal on fines make the problem worse?

Imposing a fine on a country that is already in a precarious position could drive it over the brink. That would be counterproductive and would increase the final cost of the exercise. One does not have to be a European historian to know that imposing collective “reparations” or fines on “guilty” nations has not had a great history.

I believe the better approach would be to harness the power of the bond markets, and the power domestic political and democratic oppositions to discipline Governments, at a much earlier stage in the process, if they are beginning to go in the wrong directions on debts, deficits, private sector credit, or competitiveness. This could be done without amending the Treaties, and could be built on proposals already tabled by the Commission.
This could be done by involving, as of right, the Opposition parties in all national Parliaments in the European Commission’s process of invigilating national economic policy of member states. Every consultation with the Government could be accompanied by a detailed briefing of the opposition. Given that oppositions like to expose failings of Governments, such briefings would be lever that the Commission could use to pressure Governments to adopt responsible policies.
Such a process would also have an impact on the bond markets. Bond markets may have been slow to identify sovereign debt vulnerabilities in the recent past, but they are very much on the alert now and are likely to remain so for many years to come. Unfavourable public commentary by the Commission on a Government’s fiscal policies, either directly or through Opposition parties, would make it more expensive for that Government to borrow. That would be a much quicker, and more effective, financial penalty than the cumbersome system of fines that is being proposed, and it would come into effect before it was too late.

By John Bruton, a member of the board of CEPS
Print Entry