The effectiveness of the extended European Stability and Growth Pact depends on a difficult choice between ineffective control versus undemocratic control

The Dutch financial newspaper Het Financieele Dagblad (www.fd.nl) writes a very disturbing story today: The French and German governments try to get hold of more power, while negotiating the contents of the extension to the Stability and Growth Pact (SGP) that evolved from last Thursday’s key summit on the future of the Euro-zone. This power-grab would substantially reduce the influence of the politically more independent European Commission. 

Here are the pertinent snips of this story, followed by my comments:

French-German assumption of power in new European pact

France and Germany try to assume power in the new pact for the Euro-countries that has been established on Thursday, December 7. By doing so, these leading Euro-zone countries might weaken the new set-up for independent supervision on the national budgets of the Euro-countries.

The two biggest member states of the Euro-zone are now on a collision course with the interests of the smaller Euro-countries.

International diplomats in Brussels state that a fierce battle is going on between the European Commission and the member states, during the completion phase of the new pact’s details. The members, as well as the non-members of the Euro-zone, want to settle a stricter budgettary discipline in a new treaty that will be an addition to the current Stability and Growth Pact (SGP). As this is not a treaty of all EU-member states, it is up to the applicants to decide what the role of the European institutions will be in this treaty.

According to anonimous sources, France and Germany proposed to authorize the Board of Directors of the permanent EU emergency fund ESM (European Stability Mechanism) with the role of supervisor on national budgets. This proposal undermines the current supervisionary role that is now fulfilled by the European Commision itself, as the ESM is an establishment of the EU member-states themselves and is directed by the European Finance Ministers.

The problem with the budget standards during the last twelve years has been that politicians constantly saved eachother’s bacon, thus eliminating the sanctioning possibilities that the original SGP already offered. This is the reason that the Dutch cabinet wants to diminish the political influence on the assertion and (automatic) sanctioning process of the new treaty.

France, however, wanted from the start to keep the supervising power at the member-states themselves. According to sources in Brussels, Germany complies to its reasoning.

This week new legislation has been deployed, in which the European Commission does have a main rol in the assertion of rules for budget deficits and state debt. Paris and Berlin,however, want to add parts of this legislation – a.o. the common agreement on the reduction of state debt – to the new Euro-pact. This offers the two largest Euro-zone members a possibility of creating a totally new construct for budget supervision, outside the scope of the European Commission.

A draft version of the new pact is distributed this Thursday [December 15– EL]. Senior officials of the European finance ministries gather this Thursday in Brussels to evaluate the text. The pact should be finished by March 2012.

Target of the pact is to come to a maximal degree of automatic sanctioning in case of budget agreement violations. Crucial in this scheme is to know who makes the proposal for such a sanction. The more politicized this decision will be, the bigger the chance is that it will culminate in political horse-trading in the future. Small Euro-countries are afraid of being overpowered again by Germany and France.

Last week France and Germany have already been setting course for a smaller role for the European Commission, according to insiders. After a combined press conference of ‘Merkozy’, documents were distributed that revealed that both countries wanted to make budget supervision a matter for the member states.

The crux of this article from the FD’s savvy European correspondent Martin Visser, is: All animals are equal, but some animals are more equal than others. Stricter budget rules do apply to all members of the EU, as long as these members are not called France and Germany. Every attempt to make sanctioning of budget infringements an automatic process will be futile.

This state-of-affairs supplies me with a feeling of deja-vu. On Tuesday, September 6 of this year, I already wrote on what in those days had as a working-title, the European Budget Authority:

Of course, a European Budget Authority (EBA) could help to maintain a more vigilant approach to balancing the budgets of the individual Euro-zone members. But: there won’t be such an authority and even if this authority would be set-up, it would be a toothless tiger.

France, Germany and The Netherlands will never allow not having the final word on their own budgets. Neither will all the other Euro-zone countries.

And when France, Germany and The Netherlands are forced to, they will also infringe the Maastricht budget rules, like France and Germany did before. And the penalty?! The EBA would be advised to stick it ‘at a dark place’. This means that instating an EBA would be like pulling on a dead horse.

And the million dollar question remains: what is the point of penalizing countries that are already in deep financial trouble. It is like pushing a drowning person deeper in the water in order to punish him for his irresponsible behavior.

Although the Euro-countries are now preparing something that you could call a European Budget Authority, it will indeed be the toothless tiger that I already predicted, as far as it concerns France and Germany. The small countries could be penalized, but the large countries get away… every time. 

This makes the new Euro-zone pact DOA: Dead On Arrival!

The only thing that the other Euro-countries can do is vetoing every French/German proposal in this direction. However, the presumed amount of blackmail and bribery that France and Germany will apply to the other Euro-countries, will prevent this effectively from happening.

This whole state-of-affairs makes that the success-factor of the extended European Stability and Growth Pact depends fully on a difficult choice between ineffective control versus undemocratic control.

Budget control and supervision by the European Commission is undemocratic, but could be very effective. The other option, effective budget control by the member states, is now virtually impossible, as it has just been hijacked by the democratically chosen, but totally expedient leaders of the two leading Euro-zone members France and Germany.

I’m getting more and more convinced that this generation of European leaders will not solve the European debt crisis at all, as it doesn’t possess the ‘Churchillian’ helicopter view, political headstrongness and natural leadership that is needed in this precarious situation.

These leaders are only capable to ‘keeping the store open’, but they can’t stop the tidal wave that is threatening to flood them

The selfishness, narrow-mindedness and lack of political daring of leaders like Angela Merkel, Nicolas Sarkozy, Mark Rutte and David Cameron et alumni, prevent the Euro debt crisis from being solved for once and for all.

It seems that we will have to wait for a number of years until the next generation of democratically chosen leaders runs the gauntlet, provided that the time for this is granted by the financial markets and the European trade partners. This is a very disturbing finding.