The Mechanics of European Fiscal Governance

The ECB provides some suggestions to improve the detailed processes that lie behind the Fiscal Compact in this opinion.

44 replies on “The Mechanics of European Fiscal Governance”

Thanks Philip

Reading this quickly, it is clear enough that the Fiscal Compact provisions and any underlying Austerity Programme are not mutually exclusive. How exactly it will work is not yet clear. What’s clear though is that it is wrong to assume that the Fiscal Compact rules will automatically be suspended while an austerity Programme for Ireland continues. In fact, where and to the extent possible, the Fiscal Compact will be overlaid on the austerity Programme. It will be decided by the EU. That’s how I read it as it is currently proposed.

“The ECB understands that where a Member State will rely only on financial assistance provided by the European Financial Stabilisation Mechanism, European Financial Stability Facility and European Stability Mechanism, rather than on financial assistance provided by any third countries or financial institutions, the macro-economic adjustment programme will de facto reflect the economic policy conditions agreed between all parties in the context of granting access to such financial assistance. For reasons of legal clarity, the ECB recommends expressly stating this understanding in Article 6 of the proposed regulation.”

Seems to be a moving target.

If you believe the Fiscal stuff is just money spent here and now which may or may not have a interest rate attached while the bank credit stuff is extractive of wealth via their “investments” this paper makes no sense.
However if you see this as Germany wishing to peserve a failing industrial model this makes a hell of a lot of sense.
With the commission relishing the thoughts of even more control of sad little pseudo states such as Ireland.

Europe as a whole needs both rising wage levels to eliminate personel debt and also subsequently rising oil prices to reduce excessive waste(especially oil) based consumption in conjunction with massive fiscal investment in new Nuclear & Rail.
It other words it needs more base money creation – not to give loans to banks at 1% so that they can deduct credit deposits from your average European via tax and thus survive as creatures of the night.
It needs more cash period.
If oil prices double in Euro terms what happens to oil centric German exports – yes they tank.
Germany needs a upper middle class to buy its goods , it can happily crush everybody else as they don’t buy BMWs.
Spending fiscal money wisely on projects rather then on interest improves the productive capacity of states , indeed some states even now have a fiscal memory of the past although its is almost dead given the destruction the Euro boys have done to this continent.égional

Credit money for the most part, merely burns the surplus created – but you need a surplus first – otherwise people get crushed under these Banking Tank Tracks which I guess is the idea.

Ireland is not served by these games – it needs to reverse its 1979 decision , indeed I am not sure it even made that decision in the first place – it was the Network I suppose.
I hear they are very persuasive.

This is an ECB opinion on the two-pack, which predates and is separate to the Fiscal Compact, not an opinion on the Fiscal Compact itself. The ECB line is always very simple and consistent – “we welcome the developments but they do not go far enough”. There then follows a series of suggestions to remove discretion, centralize decision making, and ramp up their vision of a federal EU. It is like a little game where they set the bar for the next step.

Since the Fiscal Compact’s new features (e.g. the automatic correction mechanism) fell into their lap as it were during the review period, it is not surprising that these provisions are welcomed too. They want everything rolled into EU law, rather than having it solely as national law, since they want to end up with a integrated federal EU. That was the whole point of the Euro after all.

@ Bryan G

Have you read the Opinion, notably its Part III “Relationship with the TSCG” (AKA the fiscal pact)?

Or article 16 of the pact itself.


Within five years, at most, of the date of entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in accordance with the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union”.

The barrier to proceeding on this basis from the outset lies with the UK.

@ Brian G Thanks for the clarification. However, it does show perhaps how it is intended to apply the Fiscal Compact. In relation to the discussion on the other thread, even when Ireland reaches zero deficit (after considerable sacrifice), it will still have debt well in excess of the 60% threshold as per Colm McC. There is nothing to prevent the Fiscal Compact rules not being applied /automatically applying at that point it seems. Even when in a Programme, convergence to the Fiscal Compact rules is envisaged (Fiscal Compact rules are not to be suspended as such it seems). This suggests that it will be Euro technocrats who will decide how much Ireland can further sustain and to what extent the new metrics will be enforced /overlaid i.e. how much additional can be extracted, and in what timescale.

That’s a far cry from what Colm envisages in his Sindo piece or in his Glidepath thread. Right now, and without more, it seems that SF is closer to correct on the range-of-possibilities spectrum. Certainly this is nothing like how the Govt and yes vote parties are selling this.

For one, I didn’t have the time to look at the detail of this before now. The conclusion it seems is even more depressing than I thought it would be. Debtor prison with hard(er) labour and poor(er) conditions for Ireland no matter how you look at this. The only offset and positive is that Govt funded employee /retiree and other groups in Ireland will continue to be paid (“prison pay” after much higher taxes), as will those in the MNC sector. The rest of Irish society looks set for the poor house. That division of Irish society is awful.

This upcoming vote is an important one for Irish society in Ireland; not a shove-in as the pro-vote camps are suggesting. The level of debate in Ireland needs to be far better informed than it is so that the Irish people can make up their minds one way or the other.


Yes I have. I don’t know what point you are making.

The point I was trying to make is that the ECB want the new Fiscal Compact treaty provisions to be included in amended EU Regulations, or to be the subject of new EU Regulations. Section III states:

If such amendments are not introduced into the proposed regulation, the ECB would strongly support the approach of presenting further legislative proposals.

The inclusion of Article 16 in the TSCG was just a calculated insult aimed at the UK, and wasn’t what I was referring to when saying the ECB wanted the provisions to be part of EU law.

@ Bryan G

Is the point not self-evident? All the signatories to the fiscal pact see it as ultimately becoming part of the EU legal structure. Why, otherwise would they have agreed the wording of Article 16? They are sovereign states, not juveniles throwing insults at one another.

The ECB is simply drawing the necessary conclusions from the stand-off between the 25 and the UK (accompanied by the Czech Republic which has its own reasons, too tedious to describe here).

I have queried on the other thread your views with regard to the ESM.

@Paul W

The Fiscal Compact provisions are certainly fully in line with the ECB’s view of how the rules should be enforced. They have long argued (for years) that discretion should be removed from national governments when the numerical rules are broken, and that procedures such as an automatic correction mechanism, with predefined tax increases and expediture cuts, should kick in if the numbers don’t add up.

It will be very interesting to see what happens with Spain, who totally failed to get any EU-level buy-in for altering their targets, given that their deficit last year turned out much worse than planned. This led to Spain making a unilateral decision that they would not abide by the agreed target. Here were some of the responses from the AAA-club:

“It makes no sense to start with declaring now that the deficit reduction targets no longer apply and pick out a few countries for which that will be the case.” (Merkel)

“we have common rules for everybody and we have just agreed on new, tougher rules so it would be completely wrong…to give more room for the deficit.” (Katainen)

He seems to have forgotten there are some strict rules (“senior” EU official)

The Spanish case can be looked at as a trial run of what will happen, though obviously the Fiscal Compact-level mechanisms are not yet in place yet, so there will be even less room for manoeuver in the future.

@ Bryan G Having worked with N Europeans for years and years, culturally none of this is surprising. What is surprising is now “ignorant” official Ireland is in relation to how to negotiate with that culture. The Germans, the Dutch, the Finns, etc will not graciously let Ireland out of Debtor Prison. They will only write off balances when there is no absolutely likelihood of recovery. In the meantime, they will sweat every Debtor to the last. They have had hundreds of years more practice at money and fiscal matters than the Irish in particular.

Irish Govt strategy has been bewildering nonsense on this for the most part.

The tactic of waiting to see what the Spanish do /don’t do (and trying to leverage off that) won’t work, believe me.


The ECB want the provisions made part of EU law before the 5 year period is up.

The Fiscal Compact treaty was the very first EU-related treaty to abandon the principle of unanimity. For example, the UK agreed to Schengen, but is not part of it. To have a statement that an intergovernmental treaty is intended to become part of EU law, knowing that unanimity is required, is legally meaningless. At most it warranted a statement in the preamble.

@Paul W

I’d agree there’s an element of wishful thinking in my position that the Fiscal Compact could be overtaken by events, however at some point it is going to become obvious that the strict application of the rules (e.g. triggering fines and mini-budgets) is making things much worse and is totally broken, as a negative feedback loop takes hold. Since major players are putting a huge amount of political capital into something that in the end just won’t work, it is setting the scene for a huge problem. The mapping of indebted countries to the model of prudent and imprudent households is a fundamental error that ignores basic accounting identities. At some point the basic arithmetic will reassert itself.

The EU Commission should now levy fines on Spain, or at least require a deposit to be lodged with the EU. Let’s see what happens…

@ Paul W Says:
March 9th, 2012 at 11:13 pm

Spot on. That is Ireland’s problem – our ‘players’ don’t know how to play the game.

With respect to the Dork et. al.

Cobh Ramblers v Barcelona – who’s your money on?


Did the ECB offer an opinion (such as above) on the reasons for its insistence that ‘no bondholder be left behind’. And did it offer a legal opinion on the legality of transferring private debt of banks to the States.
That is a serious question. I am genuinely looking for an answer to it.

RE Above paper: Amendment 2 proposed by the ECB:

“Member States shall ensure that the annual
budgetary position of the general government is
balanced or in surplus…”.

I take it to mean that every EZ country must have a balanced budget or be in surplus.
It looks like Keynes has been well and truly expelled from Frankfurt.
One has to question the sanity of such a proposal.

@ Bryan G

Your reasoning is difficult to follow. Article 16 is, of course, aspirational and unanimity remains a requirement for the insertion of the TSCG into the EU treaty structure. But the adoption of Regulations and other decisions under the existing treaties has not, and cannot, come to halt simply because of the existence of the new treaty. The ECB is perfectly within its legal mandate in tabling its Opinion. What the governments involved decide to do is another matter.

To be perfectly blunt, you and some other contributors to this blog have a rather distorted view of the leverage individual countries have in the negotiating process. Unfortunately, because of the history of Ireland’s EU involvement since the Crotty judgement, this distorted view is widespread. It could be summed up in the phrase “do that, and I will hit you with my veto!”. The situation in which Cameron has placed the UK following such a strategy should be plain for all to see but, such is the insular nature of the debate in Ireland, there seems to be little appreciation of it. (Complaining about the fact that one no longer has a veto stick with which to beat one’s opponent hardly merits much discussion if this is is the situation one has ones-self created).

Coincidentally, there are two opinion pieces in the IT today, one by Stephen Collins and the other by the paper’s impressive Paris correspondent, Ruadhán MacCormaic, with which I would agree and which sum up a number of elements in this debate.

The basic planks in the opposition to the TSCG seem to be (i) it will enshrine austerity and (ii) it cannot work either because of (a) political objections or (b) technical incoherences.

The only element that seems to me to be a really convincing argument is that relating to political objections. But overcoming these is the very purpose of the undertaking.

I would also repeat a point I made on another thread regarding the Janus-like nature of the TSCG, directed as it is both towards the EU and the national legal frameworks (notably on the issue of the debt brake). This is not a point likely to figure much in popular debate but goes to the heart of the way the treaty is structured.

Off topic, has any professional economist anything to say about the jailing of a man for six years for not paying duty on imported garlic?

IMHO it’s very wrong.


the IT’s editorial bias on the Treaty has been horribly one sided by their correspondants. They’d actually do their argument a service if they were more balanced. I’m now gonna vote Yes, having weighed up the many pros and cons, but it’ll be in spite of the IT articles rather than because of them. It’s reached propaganda and scaremongering levels at this point.

@ Rothbard

It’s a bizarre decision. I could go out and eIther beat the crap put of someone or sell smack to kids this afternoon and I wouldnt get six years hard time.


“IMHO it’s very wrong.”

What? Getting 6 years or having to pay 24 times the amount for Chinese garlic import taxes than for other foodstuffs?

On a more serious note, I agree with BEB. It’s bizarre. No doubt when we eventually lock up banksters this would indicate that they are going to get about 148 years apiece.
Hmmmmm – I doubt it.

@Bond Eoin Bond

I suspect that the turnout will be less than 50% and the more active yes’s will win because the no’s have mostly given jup and don’t have any faith that even if then won anything would change.

“…has any professional economist anything to say….”

I’ve no idea why professional economists should be the go-to guys for policy on smuggling sentences. But if I forged EUR 1.6m and got caught I’d expect to get a similar sentence.

@ Kevin Donoghue

Spot on.

White or blue collar it dosen’t matter – if you do it, take it like the scheming B*****ks that you are.

Well done Customs and Revenue, it is just this type of hypocrisy that, in part, has the country where it is.

What is so very wrong about it Rothbard?


It is not the fact that he got six well deserved years it is that the judges don’t appear willing to give 10, well deserved years, to the thugs, car theives, house breakers and drug dealers.

Inconsistant, I agree. Deserved? Most definately yes.

@Ordinary man
Have not been interested in soccer since Match of the Day times when it was on once a week and a treat.

Yee guys are not asking yourself what this excise tax is for – LTRO remember that thingy ?
Credit Banks have no purpose is a energy starved world because they can no longer take energy from the future and therefore justify their existence.

It best for a CB or preferably a Treasury to spend MONEY into existence for productive & rational energy creating or energy efficiency projects while turning our credit deposits into P.O. accounts.
This of course is likely never to happen given the hold the Network now has over all affairs of consequence.

I remember legendary jockey Lester Piggot getting 3 years for tax evasion, to teach others a lesson. When he got released (after a year or so) he came over to Ireland and got cheered to the rafters. We just don’t like rendering onto Caesar what is Caesar’s (or should that read Merkel etc.).

Will anything in the compact or the new fiscal rules really prevent a new boom/crash in Ireland? If I remember correctly the EU tried to tell Charlie mccreavy that we were in a bubble and he said that they were “just jealous”. What is there to stop a new government to say we do not agree with your opinion and then to just go ahead. How exactly will they stop us?
I know we can be taken ultimately to the court of justice but surely then we will have as many economists lined up as they have.

@ ordinary man

‘It is not the fact that he got six well deserved years it is that the judges don’t appear willing to give 10, well deserved years, to the thugs, car thieves, house breakers and drug dealers’

Maybe the judges talk to the prison governors now and again

‘How many over the numbers are you ? x OK
You have how many in the holding cells ? y OK
‘And how many on protection ?’ z Riiiiight
‘And how many on TR…n
‘And what’s that about warders off sick ?…..

…..blah blah overtime cutbacks…problems with sanitation….200 nyear old buildings….blah blah …

And the Minister said what about sentences ?

I see

What’s wrong with it? Well,

1. It’s harsh
2. It’s disproportionate vs violent criminals etc
3. The banksters who have ruined us are untouched
4. The judge went out of his way to call the guy a decent man
5. The rate was imposed by our imperial masters, so that, you know, the state can raise more money to give to to them.

But also – and no, I’m not an economist – isn’t a 200%+ import duty bad economics?

That 200% duty is to protect all those Irish garlic producers… Oh wait?
Wonder what he would have got had it been a bung to a politician?
Or welfare fraud?

@Rothbard really does have a point.

How likely do you think it is that someone not “in trade” would receive a six year sentence for a 1.6M tax bill? Ireland is full of people who use the phrase “tax avoidance” without any apparent signs of the self loathing that leading even a slightly examined life would entail and this man seems like an odd criminal to make an example of.

Obviously the Revenue has an important job to do, but in this matter as much as in the ones of the bank guarantee and the new Teutonic gimp suit of European economic policy the law appears to have those who feel its full force and those it was written to serve.

This videoand its Irish adjusted lyrics seems appropriate.

For all the Idelandic lovers…Iceland PM says they either join the Euro or someone else’s currency….

@ Shaun

Designed to protect French and Italian garlic producers apparently.

@ PR

we’ll vote yes cos of apathy? That’s a new excuse. For the record, I believe we’ll vote yes, by a margin (though still massive dangers of f***ing it up), and turnout will actually be quite high relatively.

@ Bond
They’ve also looked at the Canadian Dollar. Don’t think that you prove a point with this.
They dealt with their debt and are now shopping around for ways to protect their currency.
Shine if they did join the Euro – they would have the same currency as us but would have managed to write off a tonne of debt!
And btw apparently the Canadians were quite supportive of the deal. So if anything this shows that there are options after a default

@ Eureka

“And btw apparently the Canadians were quite supportive of the deal. So if anything this shows that there are options after a default”

The Canadian Ambassador to Iceland was supportive of the idea. And was then told to shut up, quickly. Reckon he’s high up the food chain in Canadian politics? The Icelandic default has completely destroyed their currency and monetary sovereignty. Maybe it was worth it, but a lot of people have deluded themselves into thinking it was easy, cheap and/or relatively costless.

@ Eureka,

Agree with your points there, but as far as I know opinion polls carried out in Iceland show there is no desire among Icelanders to join the euro. There appears to be a growing line of countries who don’t want to join up including Poland who want to keep their Zloty…I would imagine the know the distinction as the UK do between membership of the EU we all favour and membership of disastrous EMU.

Re The Fiscal Pact opinion piece, will not in its austerity manifesto, fix the euro. Its probably motivated by the ECB getting burned by Greece with its finances hidden away in a concealed mess.

Its redress for the design flaws of the euro is more oversight, more authoritarianism,
a bit like a draconian bank chasing people in mortgage default, in negative equity, who’ve just lost their jobs.

As we know, there has been a default marked for Greece with corresponding debt writedown. But thats not for everyone…as a manifesto for jobs and growth for countries who cannot devalue their currency and are owned lock, stock and barrel by the pawnbrokers, its derisory, but should help the debt police enforce their demands to the letter a bit better…

She is a champagne socialist of the Roy Jenkins variety – i.e treacherous – what do you expect ?
I imagine everything is far more local up in Iceland – where everybody knows each other – this makes the acts of treachery more difficult but not impossible.

@ Colm
There’s some statistic out there saying only 20% of new funding is for use by Greece – the rest is to pay down debt.

This just sees like a swap more than a bona fide default. Maybe it’s just designed to slow the default down so that German and French banks can absorb the hit

Noticed the little midget has put on his Gaullist cloak in his first campaign speech.
I don’t believe a word that man says but political rhetoric can have a life of its own after a period.
Protectionism or at least European protectionism could be coming down the tracks which may mean China could collapse pretty quickly as it only exists in its current mercantile form because of European financial capital exports.

There was a lot of nonsense about closing the fiscal defecit and yet he talked about putting state money into Alstrom and the like ? – he also questioned the Schengen agreement with France doing a NATO like opt clause I suppose.
These are not serious threats but now that the Genie is out of the bottle again it could be adopted by other political parties.

@Bond Eoin Bond

“we’ll vote yes cos of apathy”

I’m not sure which bit of ‘the majority of no voters won’t bother their arses to actually go out and vote’ you don’t understand.

The apathy vis Europe in this country is mind boggling these days as a lot of people out there just don’t think whatever they vote will make any difference because the EU will just do what it wants to anyway (this has not been helped by being told twice to vote again until they get it right).

There is a massive disconnect between those who ‘run’ Europe and your average guy in the street – massive…. and I would also bet the vast majority of people who do vote won’t be casting their vote based on knowledge either. Most of them won’t bother to actually research it.

@ PR

the septic tank/property tax/bondholder-burning/negative equity “No” brigade will be voting in the back of the actual Treaty then, yes?

@ Bond
60:40 in favour. Itll just be one of those things.
People think that economic demise is dramatic and stuff. It’s not. It’s boring. It’s Ireland struggling to function as a tax haven.

@Bond Eoin Bond

“voting in the back of the actual Treaty”?

Don’t quite understand what you’re driving at old chap.

There’s always going to be some element of ‘protest vote’ in any referendum I guess.

I grow my own Garlic.

Soft winter – could be a poor yield this year.

What’s the rate on Korean Ginseng these days?

Figuring out one’s fiscal stance is getting very complex — but necessary apparently if one wishes to avoid ending up before the European Court of Justice … spose the odds on ECJ are way shorter for growing Korean Ginseng than for serving on the board of an Irish Bank and ending up in an Irish High Court. Aw Heck – I’ll risk it … I’ll put in Chinese Garlic and Korean Ginseng and MaryJoseph Joanna, and Deutshe SauerKraut and see what happens ….

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