Prime Time - 26th January 2012

Robert Shortt blogs ahead of his report tonight on Europe's Fiscal Compact:



Earlier this month, the ratings agency Standard and Poor’s downgraded the sovereign debt of several Eurozone countries. France was stripped of its prized ‘Triple A’ rating.
The markets barely budged.
Last week Spain and Italy went to the bond markets and raised money at half the rates they were being charged before Christmas. Eurozone bank shares are up 14% in the past week.
Yesterday, Ireland stuck a toe in the treacherous waters of the bond market and successfully rolled over a portion of its debt.
Did the Eurozone crisis just end?
Not quite.
This week, the IMF reiterated its belief that the euro crisis could still bring disaster on all our heads. And the potential for Greece to slip into a messy default remains very real. So don’t break out the euro shopper champers just yet.
Next Monday, European leaders will gather in Brussels to agree the text of a new treaty; a fiscal compact it’s hoped will solve the Eurozone’s debt crisis. Tonight on Prime Time, we’ll ask what’s in the Compact and hear from those who believe it’s crucial to the survival of the single currency and those who think it’s cementing the wrong policies which will drive Europe into a recession.
The Fiscal Compact is a series of rules which have the potential to radically change the way eurozone economies are funded and run. It proposes that over an economic cycle (itself a concept about which economists argue) a country can only run a budget deficit of 0.5% GDP. That is essentially the same as running a balanced budget or one where the government takes in more than it spends. It also proposes that countries return to the old Maastricht criteria of a debt to GDP ratio of 60%.
Those profligate nations (and yes, with a forecast 115% debt/GDP ratio this year, we’re one of them) will be given twenty years to get their houses in order.
There’s a lot about reverse qualified majority voting, the European Court of Justice, automaticity (don’t ask) and possible constitutional challenges but cutting the deficit and paying off the national debt in relative jig time are two tenets of the treaty which will have far reaching implications.
We could look back fondly on the Troika as boot camp instructors because the austerity they’ve taught us will be with us for a long time. And it won’t be just us. The rest of the eurozone will be on the treadmill machine too.
That’s what scares the IMF, Italian interim Prime Minister Mario Monti and others. If everyone is on an austerity drive, where will the growth in Europe come from? IMF chief Christine Lagarde repeated again this week that Europe faces a ‘1930’s moment’ if it does not act to introduce Eurobonds and beef up the bailout fund, the ESM (European Stability Mechanism).
The optimists believe that if Europe signs up to the Compact, those countries which can afford it – namely Germany - will act to stimulate growth. It’s still a hard sell politically in Germany, as former German vice-chancellor Joschka Fisher tells us in tonight’s report, but in the end it might just happen.
And in some ways it may already be happening.
When newly installed European Central Bank President Mario Draghi opened the spigots and pumped half a trillion euro into the European banking system before Christmas, he was not acting like someone versed in the conservative arts of Germany’s Bundesbank. In central banking terms it was a radical move.
It might be one almighty kicking of the proverbial can three years down the road, but it might just give Europe’s intertwined and indebted banks and sovereigns enough time to adapt to austerity and emerge intact.
Robert Shortt