Monday, 14 March 2011

With Friends Like These.....


Imagine you are Prime Minister. Other countries from an organisation you are already a member of set up a new pact. They say you are allowed to join them but cannot attend their meetings and that you must introduce policies that will both harm your economy and increase your domestic unpopularity. Would you want to join? would you heck. Yet, these are precisely the conditions which Poland has agreed to when it asked to be included into the 'competitiveness pact' being promoted by Angela Merkel and Nicolas Sarkozy.



On Friday the leaders of the eurozone countries met to discuss this 'competitiveness pact' . The proposed pact aims to draw up a set of commitments that are more ambitious and binding than those already agreed by the EU member states. Amongst the pact's proposals are maintaining public debt below 60% and the budget deficit below 3% of GDP; reducing the tax burden for companies and linking the retirement age to life expectancy. The finalised pact will be put to a vote at a further meeting on March 24/25.

This is an attempt by Germany and France to shape the future direction of the EU and to tighten the monetarist requirements for membership of the eurozone. It ostensibly seeks to avoid the budget crises that have inflicted many eurozone members and to impose further restrictions on those economies receiving a financial bailout. The pact also proposes to further the independence of the eurozone, through - for example - the eurozone member states meeting separately once a year before the annual European Council that discusses the EU's economic policy.

This pact endangers the project of European cohesion and economic growth for a number of reasons. Firstly, if passed, its proposals would deepen economic austerity in Europe - thus imposing a set of economic measures that have proved to be both economically disastrous and politically unpopular. Ireland was the first to adopt austerity policies in Europe - egged on by Brussels - which pushed the country further into recession, thus worsening the country's public finances. Last month the electorate passed its verdict on its political masters in Ireland - suffering a fatal blow to the ruling Fianna Fáil party and its allies. The return to negative growth in the UK and the growing unpopularity of the coalition government is another such example of the economic and political results of austerity. The fact that Polish PM Donald Tusk can even contemplate winning a second term in office this year is mainly due to the fact that his government has so-far avoided the outright economic assault launched elsewhere.

The proposed pact threatens to create new divisions within the European Union. The eurozone is made up of only 17 states, with the majority of the non-eurozone members of the EU situated in Central-Eastern Europe. The further separation of the eurozone members threatens to weaken the political influence of these states and it was for this reason that countries such as Denmark, Hungary and Poland initially protested against this move. However, the threat does not end there.

Already some within the richer eurozone states - such as Germany - are suggesting that a new division of the eurozone is created. This would involve splitting the euro into two zones - one encompassing the 'northern zone' centred around countries such as Germany, Austria and the Benelux countries and the second a 'southern zone' encompassing countries such as Spain and Italy. The regressive nature of this proposal is underlined by some justifying it through claims of 'cultural differences in mentality' . Forget the huge benefits that Germany has enjoyed as the main exporter in the eurozone, don't mention how Germany was one of the first countries to break the Growth and stability Pact, remain silent about how countries such as Ireland have had to pay draconian interest rates on their recent loans.

These new divisions in Europe have potentially negative consequences for the poorer countries in Europe who stand outside of the eurozone. Non-eurozone countries such as the UK enjoy stronger, more stable currencies and are able to follow a more independent economic course. However, for countries in CEE such an option is not possible. These economies are more exposed to the global financial markets and often suffer from outflows of capital and currency uncertainty. This was evident following the outbreak of the economic crisis in CEE when the currencies in Poland and Hungary devalued by 30% and 20% respectively. This situation is particularly dangerous in CEE, as a large proportion of loans (up above 80% in the Baltic States) are taken out in foreign currencies.


Fearing being left adrift Poland is now seeking to be incorporated into the 'competitiveness pact'. Tusk has confirmed that he would like Poland to sign up as a non-eurozone member - although it would not be able to participate in the meetings or influence their decisions. This would place further pressure upon Poland to introduce its own austerity measures. Already Poland is obliged to meet the Maastricht criteria by 2012 and has - for example - committed itself to bringing down its budget deficit to below 3% of GDP (from its current near 8%) by next year. Two weeks ago the Polish government sent a letter to Brussels outlining how it would do this (read: more spending cuts and increased VAT).


By committing itself to the 'competiveness pact' Poland is hoping that it can embark on a fast-track towards adopting the euro as its currency. This indeed would be a great stabiliser for the Polish economy and the eurozone's expansion into CEE would be another step towards the integration of the European economies. However, currency integration along the lines set out in the Maastricht Treaty (let alone the competiveness pact) promises economic stagnation not growth. For these reasons, the Polish population is increasingly sceptical about entering the eurozone (whilst on all other matters it is extremely pro-European). Therefore, whilst in 2002 nearly 65% of society supported adopting the euro, this had fallen to 52% in 2009 and 41% in 2010 (with 49% against).

The economic crisis is destabilising the EU and bringing into question the principles of solidarity and economic cohesion. Rather than constraining itself in a pact upon which it has no influence and from which it has little to gain Poland should be using its influence in CEE and beyond to propose alternatives to the policies of austerity and division.

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