Radical EU treaty revisions could deepen euro crisis
Updated: 2011-12-09 08:36
By Cecily Liu and Zhang Chunyan (China Daily)
LONDON - Radical revisions of the EU treaty as a last-resort solution to preserve the euro may push the eurozone into a deeper crisis, European analysts warned.
"The necessary fiscal discipline that will be imposed on heavily indebted countries will create deep social difficulties, which, if poorly managed, could hurt them for the generation to come," said Didier Cossin, a professor of finance and governance at the Switzerland-based IMD Business School.
Cossin's words came as European Union leaders in Brussels planned to discuss proposals on Thursday and Friday to revise the Lisbon Treaty to ensure that tough new fiscal rules for the eurozone are placed on a legal footing.
France and Germany are expected to lay out their plan to impose mandatory penalties on euro states that exceed deficit targets, aiming to restore market trust and end the region's debt crisis. European Council President Herman van Rompuy, who is chairing the two-day summit, has proposed that each eurozone member's budget should be below 3 percent of GDP, a national debt under 60 percent, and a "golden rule" should be enshrined to guarantee balanced budgets in the medium term.
This would mean stringent austerity measures in countries like Greece, where the national debt is estimated by international lenders to peak at 186 percent of GDP in 2013, compared to just 83 percent for Germany. "In countries like Greece, where many billionaires have already secured their fortune outside the country, the risk of a long-term negative prospect for working classes is credible and can thus lead to unrest and political instability," Cossin said.
Richard Wellings, an expert at the think tank Institute of Economic Affairs, also said that deeper fiscal union between countries with large growth disparities would eventually lead to the creation of a "transfer union", with stronger countries subsidizing weaker ones.
"The stronger economies would be damaged by higher taxes, while the transfers would crowd-out private-sector activity in the weaker economies, preventing their recovery. Both consequences would speed up the region's decline," Wellings added.
The EU treaty revision proposal has also fuelled concerns in the UK, a bigger player in the 27-country European Union although not in the eurozone.
British Prime Minister David Cameron said before the summit that he will "defend and promote British interests" at the Brussels meeting.
"Deeper integration in the eurozone means more EU policies could be made centrally, but British leaders will try hard to stop policies like the Financial Transaction Tax and stricter labor market regulations," said Jonas Parello-Plesner, of the European Council on Foreign Relations, a think tank headquartered in London.
Eurozone ministers agreed on Nov 30 to boost market confidence by leveraging the European Financial Stability Facility (EFSF), a bailout fund established this year to give emergency loans to struggling eurozone countries, but warned they may have to turn to the International Monetary Fund (IMF) for more help to avert a financial disaster.
The US refused to contribute to the EFSF through the IMF, but last week the Federal Reserve joined hands with central banks of England, Canada, Japan and Switzerland in a coordinated campaign backed by the European Central Bank to provide cheap emergency loans to distressed European banks.
"These banks have no choice, the interconnectedness of the world's financial system economy means the price of the euro's collapse will be paid by everyone," said Nicola Casarini, research fellow at the EU Institute for Security Studies.