Diplomatic Economic Club^{® Since 1997}

The way to the present „financial compact“ was long and turbulent: it started at the end of March 2011with the „euro plus pact“ for stronger economic policy coordination, competitiveness and convergence. Then at the end of 2011, in December came an international agreement „on reinforcing economic Union“; due to differences in approaches among the member states, it was decided to make „an agreement“ instead of an amendment to the existing Lisbon Treaty, which would require national referenda. That the efforts are timely and prominent was proved feasible by 25 member states with the UK and Czech Republic abstained.

German-French close ties have been the driving force behind the new stringent financial and budget measures. These close ties – habitually dubbed „Merkozy alliance“ – have built during the eurozone crisis. Both countries have shown vigorous efforts to combat the critical stage in their economies.

Thus, Mr. Sarkozy stressed the importance of structural changes to boost France’s weak industrial competitiveness and stimulate jobs. The government announced a cut in high labour costs by reducing by ? 13 bn social charges on employers, the highest in the EU. The cut will be funded by an increase in VAT to 21,2 % from present 19,6% and an increase in taxes on banks.

Another government’s novice is a proposal allowing companies freedom to negotiate flexible working hours and pay levels significantly eroding France’s statutory 35-hour working week. Besides, France is adamant of the Tobin tax proposal: it plans to introduce in August a tax on trading in some financial products, e.g. shares, as a first step to a full financial transaction tax.  

According to almost all expert sources after the summit, the general mood was that heads of state and government in the euro area as well as in other member states took note of detailed structural reforms in their countries. Procedures for excessive deficit and coordination of major economic policy reform plans are regarded as highly timely efforts.

The summit underlined that under the agreement –a financial compact – in reviewing and monitoring budgetary commitments, the Commission is acting according to the Lisbon Treaty provisions (art. 121, 126 and 136 TFEU).

Jean-Claude Juncker, Luxembourg’s prime minister said after the summit: „We have to learn to explain that the approved fiscal discipline is not just about our finances, but we also need the prospect of growth“.
Some linked the new pact to outlawing Keynesian-style fiscal stimulus.

It was the ECB that fueled hope into the member states’ positive approach to the „compact“. The ECB’s decision on the eve of the January’s summit anticipated the support for financial austerity. Global bank bonds have been enjoying strongest monthly rally in nearly 3 years after the ECB injected ? 489 bn into the eurozone banking system, averting liquidity crunch. Otherwise the perspectives for economic growth would be undermined.

The ECB’s bond rally highlights the bank’s long-term refinancing operation (LTRO) which would help to support investors’ sentiments.

More than 500 banks across Europe already bid for this – almost half a trillion – ECB’s three-year loan announced in December 2011. A second tranche of the LTRO is due in February 2012.

European banks are prepared to tap the ECB’s funding scheme for up to twice the amount previously voiced, i.e. up to 1 trillion euro, providing further evidence of the sector’s stable liquidity.

No doubt, the EU financial pact puts the end to budgetary and fiscal populism. Lithuania’s President mentioned after the summit that the country was „already implementing stringent fiscal discipline measures“; she added that Lithuania’s accession to the treaty would serve to consolidate the budget and eradicate ways to irresponsible decisions and financial populism.

The general summit’s outcome is that regardless of which political party would be in power in the Baltic States in the coming years, these states would be obliged to deal with the national budget and finances in a responsible manner.

According to the agreement, the compact is valid from this March. However, some experts predict the full-scale implementation in about a year. Other provisions would be visible much later: thus in the agreement’s conclusions (Term Sheet on the ESM) a transitional phase is precluded from 2013 to 2017. It postulates that the member states „commit to accelerate the provision of appropriate instruments in order to maintain 15 per cent ration between paid-in capital and the outstanding amount of ESM issuance“.  

Officials believe that the successful pact’s implementation would force Germany to back increasing the size of euro-zone’s rescue fund to about ? 750 bn.

Eugene Eteris Baltic-course.com