ANALYSIS:THE CENTRAL contested question in democratic politics is how much governments should spend and how much they should tax. Any attempt to constrain political parties in the tax and spend choices they offer voters would amount to an assault on democracy. A vital question for Europeans in this moment of crisis is this: do any EU-level measures already implemented, or those being proposed, amount to such an assault on national democratic choice?
The answer is no – and that includes the latest proposals on closer budgetary surveillance put forward by the European Commission in Brussels yesterday. As long as that remains the case, deeper economic co-ordination poses no threat to Ireland, or anyone else.
New rules do not seek to impose levels of taxation/spending on countries. France and Finland, where government is big and taxes high, will not be obliged to shrink the state and cut taxes to some target level. Greece and Portugal, where the role of the state is much smaller and taxes lower, will not be obliged to increase public provision and taxation. The objective of new rules is not to impose a uniform state size across the continent. Nor is there any reason to do that – no hard evidence exists to show a level of tax/spending that generates most prosperity.
The objective of the new rules is to stop politicians being dishonest with voters. Lots of public services means lots of taxes. Low taxes mean fewer public services. The days of having it both ways are over.
The temptation for governments to spend more than they raise in revenues has proved irresistible. Since the 1970s, from Japan to Europe to North America, fiscal discipline has weakened in the rich democracies. Year after year, governments have run deficits. These have accumulated, causing national debts to grow ever larger.
The financial system ignored the risks of growing indebtedness and kept lending. Often it lent recklessly (and not only to governments). Such reckless lending allowed some governments to run up unsustainable debts. When the biggest bubble in financial history burst in 2007-2008, everything changed. We are still living with the consequences.
The epicentre of the international financial crisis is in the euro zone. Although the single currency did not cause the sovereign debt crisis, it has magnified its effects. As even the European Commission acknowledged yesterday, greater connectedness among national economies makes for greater spillover effects from one country to another when things go wrong. Now, spillover from the periphery threatens to engulf the entire zone and drag Europe’s economy down. This amounts to a profound failure. Much change is needed. That change is in train.
Since European leaders agreed in principle to abandon the euro’s no-bailout clause in February last year, two rafts of measures have been agreed. These seek to increase scrutiny of national governments’ economic policies and make sanctions for those who break the rules more credible and more onerous. Further intrusive measures are being suggested, with new proposals being put forward by the commission.
Yesterday’s dual proposal – on options for the issuance of eurobonds and suggestions for further deepening scrutiny of national budgets – are both good.
The only way the euro zone’s spillover problem can be dealt with in the long term is for a collective bond. The US and Britain can borrow at low interests with larger deficits and debts than the combined euro zone because they have appropriate fiscal institutions for their monetary unions. European monetary union is unlikely to survive without a fiscal union with the power to raise its own debt.
The centrepiece of yesterday’s surveillance proposals is that draft budgets be shared with the commission and peer countries in autumn so everyone can comment on everyone else’s plans. This is good not threatening – more eyes pouring over national budgets means weaknesses are more likely to be spotted.
Having an open, equal and intrusive system of peer review will do much to offset the weaknesses in Ireland’s way of managing its economy. If, a decade ago, the Ahern government had heeded the commission’s warnings about an overheating economy and then salted more away for a rainy day, the property bubble would not have grown so large and the budgetary capacity to mitigate its bursting would have been greater.
And it is not only the recent past that proves the need for someone to shout stop. Ireland’s long-term economic management record has not been good. Budgetary policy has been very heavily influenced by the electoral cycle, with governments splashing out before elections and slamming the breaks on after the votes are counted. The political system has managed to generate two entirely separate fiscal crises in a single generation. Making matters worse, the system has proved bad at learning lessons – from its own mistakes or others’ successes.
But will euro zone governments pay more heed to Brussels’s latest urgings than the Irish government did to its recommendations 10 years ago? The commission has the right to propose ideas in many areas. But this power is not strong because it is up to the member state governments and, to a lesser extent, the European Parliament to put them into action. So there is a good chance yesterday’s proposals may come to nought – and Germany was predictably quick to attack the euro bond idea.
But regardless of what happens to these proposals, or, indeed, the euro itself, the era of deficit spending is over. Austerity will replace profligacy and fiscal rectitude will replace fiscal recklessness. This is necessary to make debt levels safe and reduce the risk of another crisis.
Achieving that end by curbing politicians’ freedom to bribe voters with borrowed money is to be welcomed. Many checks and balances already exist to prevent democratically elected politicians from doing wrong. More are needed.