December 14th, 2011
04:26 PM GMT
London (CNN) – The latest developments in the euro crisis are just like the holiday parties we go to at this time of the year. We make merry, binge - and then suffer horrible hangovers in the days after. It hasn’t taken long for the euro-hangover to arrive. The bonhomie of the euro-deal has evaporated.
I decided to wait a few days before writing about the agreement in Brussels. It is easy to succumb to the enthusiasm of a late-night deal, believing that it will bring “peace in our time” and a “chicken in every pot.” To hear the EZ17+ leaders on Friday it was surely just a matter of dotting the Is and crossing the Ts. Only with the reflection of a few days can you see what works, what doesn’t - and who will change their mind.
The “fiscal compact”was a fine piece of German-French engineering, in the best traditions of euro-fudge. It establishes the “fiscal rule” requiring balanced budgets for all signatories to the new treaty, followed by automatic sanctions for those that fall foul.
In any event, it offered up vast new powers to the European Commission and European institutions but didn’t address the safeguards of countries like Ireland who might need referenda to approve them. It left so much to be negotiated between now and March that it is not surprising the Czech Prime Minister Petr Necas now describes it as a blank piece of paper.
The biggest objection I have to this new treaty is that it assumes deficits are a bad thing. There is no flexibility to run general deficits and yet, as the past three years has shown, flexibility in policymaking is crucial.
The ability for the U.S. to have the Troubled Asset Relief Program, a stimulus package and ultra low monetary policy all played roles in ensuring a recession didn’t become a depression. The UK introduced quantitative easing, or QE, and then QE2, while the government runs a deficit of 9%. And still the economy is sluggish to the point of recession. Imagine if they had been shackled with the nonsense of this agreement.
Ultimately, this may not matter because European countries have shown a remarkable ability to do what they want, when they want it. Everyone is conveniently forgetting the fact Europe had a previous strict regime on deficits: The Maastricht criteria, which became part of the Stability and Growth Pact. Nations were supposed to have deficits of 3% or less. Except Germany and France both bludgeoned the others into suspending the pact in 2005, when the going got tough.
In other words, they changed the rules. They did it before and the results are plain to see. They can do it again. Party now while the time lasts. There are many more hangovers to come.