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Petr Mach: Financial Crisis and the Treaty of Lisbon

Euro, 8 December 2008

Published in Czech on 8 December 2008

On November 26 2008, the European Commission published its "European Economic Recovery Plan" (1) – a plan to spend EUR 200 billion of the public money with the aim to resist the current recession which some EU countries are facing. The plan was accepted by the prime ministers of the member states at the Council meeting on December 12 2008.

There are two things in this plan, in addition to its Keynesian economic nature, that one should take note of: First, the European Commission has no EUR 200 billion, and so it actually expects that the money will be spent by the individual member states upon the Commission’s call. This implies the second, that the Commission acts as if the Lisbon Treaty, which was supposed to give the European Council a mandate to set guidelines for the economic policies of the individual member states, were already in effect.

Keynesian Nature of the Plan

In principle, any economic problem can be approached in two ways: the first approach – let us call it socialist or Keynesian – based on the politicians’ conviction that they know better than the ordinary people how to spend the ordinary people’s money. The second approach – let us call it liberal – is based on the fact that politicians do not know better than we how our money should be spent, and economic choices should therefore be left up to the individuals where possible.

From this perspective, the Commission’s plan is Keynesian, not liberal. The U.S. economist, Russel Roberts, aptly described the nature of this kind of redistribution and "fiscal stimuli" as follows: "It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end". This is exactly what the EU wants – that the member states encumber themselves with debt and thus push out private investments from the loan market – and the European Commission could, in agreement with the prime ministers of the member states, say that the EUR 200 billion is somewhat extra money, money that will save the European economy from the financial crisis.

Who is going to pay for it?

The plan foresees that out of the EUR 200 billion, EUR 170 billion will be spent by the individual Member States by way of increasing their public debt, the remaining 30 billion will be provided by the European Union. But the EU does not even have the 30 billion. The European Union has an approved financial framework until 2013 and the GDP percentage, which the Member States send; the distribution is pre-defined, and the largest portion is used up by the farm subsidies. That is why the EU wants to use a quasi-fiscal tool: the European Investment Bank, an institution whose shares are held, other than the EU, by the individual Member States. The bank is supposed to supply most of the "European" 30 billion EUR in the form of bank loans.

Do we want politicians to use political decisions to force banks to provide loans for politically preferred projects? At any rate, fulfillment of political goals through banks is not without cost. Since the accession to the EU, the Czech Republic alone has paid EUR 200 million (CZK 5.2 billion) from its state budget just to help increase the capital and reserves for covering the losses of the European Investment Bank. (The breakdown of contributions of all countries is available on www.money-go-round.eu.) And the Commission is now asking the Member States to increase the capital and reserves of the European Investment Bank so that it could provide the politically motivated loans in order to "save the economy". There is a risk, however, that the politically motivated loans to eg. Germany’s ailing car makers will become irrecoverable – thus worsening the financial crisis, which they were supposed to heal.

Planning Commission

The plan "sets out a comprehensive programme to direct action to ‘smart’ investment". What the European Commission is probably trying to say is that its members are smarter than millions of people active in the market. The plan literally says that billions of EUR will be used for "factories of the future". So, there will probably be some factories of the future controlled by the European Union. More billions are supposed to subsidize the production of "environment-friendly" cars.

Commenting on the plan, Barroso says: "Europe needs to extend to the real economy its unprecedented coordination over financial markets." While economists may try hard to figure out what it means to extend to the real economy the unprecedented coordination over financial markets, I suspect that what the European Commission really wants is to extend its own powers and to weaken the market forces. The plan also foresees that the EU will redefine the mission of the recently established "European Globalization Adjustment Fund" – its new mission is said to be "helping peopletofind jobs" – it is therefore supposed to become a sort of multinational employment bureau.

In other words, this plan gave birth to a super-planning commission in Brussels. The people who wrote this Plan probably already have their offices in the Commission.

The Plan also says that "Member States should consider reducing employers’ social charges on lower incomes". Does the European Commission know better than democratically elected politicians in the 27 Member States what specific social policy should be pursued? "The Commission will develop guidelines allowing state support for loans". Bravo! Let us remember that we joined the European Union where the principle of single market was subject to the condition that the individual Member States cannot distort the market by providing support to their individual manufacturers. The European Commission says this should end.

The Plan is really "comprehensive". For example, another part of the plan says that "public authorities should pay invoices, including to small and medium-sized enterprises, for supplies and services within one month". Why within one month? And why specifically to SMEs? The answer is simple: because the central commission said so.

In other words, the Commission’s proposal represents a broad central planning scheme and an economy controlled from the center in Brussels. The only obstacle is a political one. The plan would have to be embraced by the prime ministers of all Member States. Otherwise it would not be a plan of the European Union. But what if all Member States do not have socialist governments? Why should for example the Czech Republic get into debt on the instigation of the European Commission when we do not even have any financial crisis after all? Why should we pour more money into the European Investment Bank so that it could help saving German car makers?

I am afraid that the European Commission is deeply mistaken in that the measures proposed could improve the economic situation. Redistribution of money and centrally made decisions about in what and how much to invest have always led only to economic decline.

The European Union badly needs defense mechanisms that would stop such plan.

Lisbon Treaty Is Not in Force

The European Union, however, does not have any mandate today to control the economic policies of the individual Member States under the basic treaties. The European Union treaties only mention a provision on the economic policy in the Maastricht Treaty, requiring that the countries seeking to join the Euro Area maintain the public finance deficits below 3 % of the gross domestic product and that their public debts not exceed 60 % of GDP. The countries that are already members of the Euro Area are subject to the so-called Stability and Growth Pact, according to which the public finance deficit must not exceed 3% of GDP subject to financial sanctions. The treaties mention nothing about the Commission being able to call on the Member States to get into greater debt or to tell them for which they should use such loans.

The Treaty of Lisbon was supposed to change this. It says: "The Member States shall coordinate their economic and employment policies within arrangements as determined by this Treaty, which the Union shall have competence to provide" and "…To this end, the Council shall adopt measures, in particular broad guidelines for these policies." In addition, the Treaty of Lisbon would incorporate into the basic law of the European Union for the first time the basic character of the economic policy: "The Union…shall work for the sustainable development…based on…social market economy, aiming at full employment and social progress." A liberal economic policy is thus ruled out.

These provisions are completely taken over from the previously rejected EU Constitution. The Treaty of Lisbon changed one single thing as opposed to the rejected European constitution: Upon the request of the French president Sarkozy, the following sentence was deleted: "The Unionshall offer its citizens … an internal market where competition is free and undistorted." Instead, it merely says that "The Unionshall establish an internal market".

I would not have any problem with the Plan if it were, say, a French plan of a democratically elected French government, implemented in France. But I cannot agree that this should be a central economic plan of the European elites for all European countries.

Conclusion

A sensible person must agree, after having studied the plan of the European Union, that it is not about financial crisis. The Commission’s proposals are unlikely to heal the financial crisis. Quite the opposite, through the so-called crowding out effect it will make it harder for businesses to access loans. The financial crisis has become an excuse for the European Union to increase the socialization of the economy and to usurp new powers. Somebody should tell the European Union that it does not yet have a mandate to do so.

Someone should remind the European Union that the Treaty of Lisbon has not been ratified yet.

http://ec.europa.eu/commission_barroso/president/pdf/Comm_20081126.pdf

Petr Mach is executive director of Center for Economics and Politics, a think tank based in Prague. Originally published in Czech on 8th December 2008

Petr Mach

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