One overlooked aspect of the agreement struck by the member nations of the European Union over fiscal and budgetary alignment is the matter of enforcement. The failure to incorporate the proposed agreement into the EU’s basic treaty, the Lisbon Treaty, means that neither the European Commission nor the European Court of Justice will have standing to deal with recalcitrants. Both institutions’ writ runs only to treaty matters, not those covered by intra-EU sub-agreements and those between national governments, as this latest deal will be structured in the face of opposition by non-euro-using countries, notably the UK.
That is one reason that the agreement envisions the new fiscal and budgetary constraints being baked into national constitutions, and the European Court of Justice being given new powers to adjudicate on whether countries are baking in the Brussels-approved manner. This is a conscious attempt to put the governance of national fiscal policy under greater judicial and less political sway, just as the EU has used the courts to enforce central directives in other areas.
One of the failures of the Maastricht agreement that launched the euro 10 years ago was that countries’ compliance with the economic conditions for membership – holding budget deficits to no more than 3% of GDP was one of them, remember – was entirely in the hands of national politicians. For all the goodwill being expressed towards greater fiscal integration in the heat of the euro debt crisis, national politicians are not going to give up their power of economic policy making willingly. Many will see this as the judicial Trojan Horse that will lead to a Federal EU with full economic and political integration. National politics is going to continue to shape Europe’s fiscal integration, and markets will have to learn to live with all the uncertainty that implies.
In the card game 21s, a player can ‘twist’ to get another card from the dealer in the hope of reaching an aggregate face value of his hand of exactly 21. More often it is done in hope rather than expectation. So with the U.S. Federal Reserve’s latest attempt at stimulating the U.S. economy, Operation Twist. Banish the thought that this could be called QE3. After all, the Fed’s second round of quantitative easing did not achieve much in the way of generating additional demand to get the U.S. economy growing at anything but the most sluggish pace. It faces the same uphill battle with Operation Twist, intended to nudge down long-term interest rates as QE2 was intended to push down short-term ones. (Historic footnote: when the Fed tried the same tactic in 1961 it was originally called Operation Nudge)
Operation Twist will work like this: Between now and the end of June next year, the Fed will buy $400 billion dollars in Treasury bonds with maturities of 6-30 years. It will finance these purchases by selling an equal amount of debt with maturity of 3 years or less. In this way it will lengthen the average maturity of its debt holdings but does not need to expand its balance sheet to do so. Creating demand for longer-term bonds should drive down their yield.
Yet the U.S. economy already has very low interest rates by historic standards, and has, by now, had them for some time. It is not the cost of credit that is the issue but the demand for it. Large companies are awash with cash. They have neither the need to borrow, however cheaply, nor, more importantly, for as long as they see no increase in final demand for their goods and services, the appetite to invest that would require borrowings. Similarly with individuals. Mortgages, which are tied to long-term interest rates, are already cheap, for those who can get them, or want them. The housing market in the U.S. is not only battered but frozen. The lack of consumer confidence under the long dark shadow of persistent high unemployment is keeping it so. So neither companies nor individuals are prepared to commit the spending needed for a sounder recovery. Easier monetary conditions won’t make any significant impact on that.