In the links this morning, I linked to a Handelsblatt interview with the head of Austria’s social democratic EU parliamentarians. The overall gist of his comments were that he believed the EU budget was ‘catastrophic’ because it was in deficit. However, he was arguing for additional revenue to support better infrastructure and increased employment. This is the standard social democratic political position in both Austria and Germany. But, as the EU budget wrangling has begun it is the intervention for austerity by British Prime Minister David Cameron that has won the day.
Here’s how Bloomberg News reported the events:
European Union leaders agreed to a seven-year budget that cuts spending for the first time, bowing to U.K. Prime Minister David Cameron’s insistence on thrift.
The deal was struck after 25 1/2 hours of talks in Brussels, according to a post on Twitter by EU President Herman Van Rompuy today. While he didn’t disclose a figure, the final draft blueprint for 2014-2020 included a spending ceiling of 960 billion euros ($1.3 trillion), down from an original proposal of 1.047 trillion euros and less than the 994 billion euros spent in the current budget cycle.
At the center of the controversy was Cameron, making his first EU summit appearance since announcing plans for a referendum that could result in Britain leaving the 27-nation bloc as early as 2017. Britain’s demands for savings ran into opposition from France, Italy and eastern and southern European economies keen to tap EU subsidies.
“The numbers that were put forward were much too high,” Cameron told reporters before the summit started yesterday afternoon. “They need to come down, and if they don’t come down, there won’t be a deal.”
What I think is interesting about this encounter is the irony of it all. Here you have Britain, a nation with a sovereign currency that shields it from the budgetary angst that euro zone members have when deficits cause government bond yields to rise. And the Prime Minister, David Cameron, has imposed the same kind of austerity on his country that euro zone nations must even though he doesn’t have to do so. And the result has been disastrous for Britain as the so-called triple dip recession threat is all over the British press. Yet, when it comes to the EU, it is the anti-EU sentiment in Cameron’s own party that has caused him to extend his deficit hawkish policies to the EU level. If the Conservatives in Britain didn’t have a large faction that actively disdained everything the EU stands for, Cameron would not be doing this. And so, ironically, it’s Britain’s own hatred of the EU which has caused it to impose austerity on the EU budget at the worst possible time for it to do so.
I should also point out that Mr. Cameron in effect vetoed any budget deal that did not show significant spending cuts. While the EU leaders have agreed to this historic austerity budget. It does still face significant hurdles before being passed into law.
What does this mean?
To me it means you can forget about trying to establish a countercyclical federal European budgetary mechanism, what I dubbed the European Harmonisation Fund three years ago when the European sovereign debt crisis first began. In October, I wrote how German Chancellor Angela Merkel was talking about setting up a solidarity fund – funded by a financial transaction tax – that would be a EU-level countercyclical fund for smoothing out economic troughs and preventing crisis better than Europe has done through current mechanisms. That’s not going to happen. Britain, a country that is supposedly going to vote on whether it even wants to be in the EU has torpedoed it. That shows you how dysfunctional the EU and the euro zone both are.
So, Cameron’s EU budget veto effectively means Europe will continue to be dysfunctional. And that means no real solutions to Europe’s problems are going to be on offer. Instead, Europe will only react to events that threaten the euro existentially with dissolution. In the meantime, I expect austerity to be the policy weapon of choice to deal with the budget deficits the crisis has precipitated, making the likelihood of robust European growth or ECB interest rate increases extremely dim.