Patrick O’Brien: The European Fiscal Treaty: Constitutionalising ‘The Road to Serfdom’?

I start with a very old bad joke. A tourist is in Dublin, Ireland. In the midst of pondering the evident decline in the country’s fortunes (empty blocks of new apartments, growing anti-European sentiment, grizzled former bankers by the side of the road holding forlorn signs that read ‘will create dubious leveraged financial products for food’) she forgets herself and gets lost. Finding a friendly native she asks how to get to Grafton St. The bemused native responds: ‘Well, I wouldn’t start from here.’

I was reminded of this joke by the new European fiscal treaty.  The headline of the Treaty does two significant things. Firstly, it requires state parties to observe a balanced budget rule. Once the debt brake has come into full operation each state will be required in general to run their budgets in surplus or balance, and at a minimum to keep their structural deficit (that is, the amount of borrowing required to maintain their day to day operations – hospitals, schools and so on) below 0.5% of GDP. Secondly, the Treaty requires states to keep their overall government debt below 60% of GDP. Those who have exceeded this target are required to reduce their debt by one twentieth each year.

But these objectives are for the long term. Within the treaty there are exemptions for emergencies and severe economic downturns, so we must assume that these targets are not currently applicable to countries in trouble. In the medium term, each state will follow a tailored country-specific plan devised for it by the European Commission with which it must comply as it goes moves towards the twin 0.5%/60% targets. And in the short term, the state parties are required to enshrine these rules, together with a ‘correction mechanism’ in the event that the targets are not met, in domestic law within a year ‘through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes.’ (Art. 3[2]). In the event that the signatories fail to meet their obligations the Treaty provides for enforcement procedures through the European Commission and the ECJ.

I have two points I want to make about the Treaty. The first is a specific one relating to Irish constitutional law.

Art. 3(2) is tailored to reduce the likelihood of a referendum in Ireland and later in the same paragraph we find the positive sounding but rather otiose: ‘This mechanism shall fully respect the prerogatives of national Parliaments’. But it is very difficult to see how a ‘binding and permanent budgetary rule’ can ‘fully respect the prerogatives of national Parliaments’. The two ideas are opposed. The whole point of the treaty and of the debt brake project is to deprive national Parliaments of some of their prerogatives: at present those prerogatives include the power to run consistent budget deficits. Under the Treaty the European Commission, ECJ and other member states will be empowered to discipline Parliaments that do so.

There is some debate in Ireland as to whether a referendum is constitutionally required and what exactly the case law means. The Crotty case requires a referendum in the event of significant unanticipated change to EU competences. The Fiscal Treaty is not an EU treaty but an international treaty (albeit one that makes liberal use of EU institutions for its administration and enforcement). Suffice to say that we are in uncharted territory. But conversely if a referendum is not held what status will the debt-brake legislation have? There is (normally) no intermediate status in Irish law between ordinary legislation and the constitution and so the legislation will not be constitutionalised, in the sense that the text of the constitution will not have been amended. It is possible that the legislation might have some form of soft-constitutional status, but Irish politics and law rely heavily on the written constitution (as opposed to constitutional conventions) and this would still leave it open to being struck down by a future court as unconstitutional, or to being amended by the legislature as it saw fit. If this state of affairs is compatible with the Treaty and if states other than Ireland can take a similarly loose attitude to ‘permanent’ and ‘constitutional’ is Art. 3(2) a dead letter before it is even ratified?

There is another possibility, although it is a rather convoluted one. Art. 26 of the Irish constitution provides for an abstract judicial review procedure whereby the President, if he is uncertain about the constitutionality of a piece of bill presented to him for signature, can refer the matter to the Supreme Court for determination. If new President Michael D Higgins were to trigger this procedure in respect of the debt brake the supporters of the Treaty might not be entirely disappointed. The (much criticised) quid pro quo of the Art. 26 procedure is that if the Supreme Court gives the bill a clean bill of health it is, in effect, immunised from further constitutional scrutiny in perpetuity. This may be the only way that relative permanence can be assured in the Irish constitutional system without a referendum.

On to my second point. Is the debt brake rule enshrined by the Fiscal Treaty likely to work?

Article 7 of the new Treaty creates a procedure permits a qualified majority of the parties to overrule the Commission’s proposed course of action. When Ireland broke the Stability and Growth Pact early in the last decade by permitting inflation to get too high it was disciplined. When France and Germany did so by running high budget deficits, they persuaded other member states to overrule the Commission and the Pact became a dead letter. On one view Article 7 could create one rule for the big countries and another for the small.

The experience of the Stability and Growth Pact (Mark I) parallels that with debt brakes more generally. These provisions work – like most constitutional rules – when there is broad political and legal acceptance that they should work. Debt rules feature in a majority of US state constitutions and seem in general to work relatively well. But the existence of a debt brake clause did not prevent California from effectively defaulting on some of its debt in 2009, when it issued IOUs to its employees instead of paying them. The US constitution contains a provision to the effect that federal debt shall not be questioned; however this did not prevent the US from effectively defaulting on some of its debt in the 1930s when it pulled out of the gold standard. Switzerland enacted a debt brake in 2000 which has proven reasonably successful, but that replaced a similar provision in the constitution that had become a dead letter. In Germany, the new debt brake rule brought in in 2009 replaced weaker economic rules in the Basic Law that had become ineffective.

Even in Germany, it seems, constitutional debt rules will work only when they work: when they become politically possible. In Greece, in Spain, in Ireland, in Portugal, in Italy these rules will work – well, only if they are accepted. But in political terms the Treaty starts in a very poor position. There is powerful popular opposition to austerity in most states and it seems unlikely that can outrun this for much longer than one electoral cycle (in Greece in particular, where there are elections due in April). Political opponents can pray some strong economic arguments in support of their position. When even The Economist and The Daily Telegraph – those radical lefties – begin editorialising the Keynesian line that European spending cuts have gone too far and have started to create a bigger problem than the one they were intended to solve, it is safe to assume that the policy is ripe for review.

The European project has muddled through with the thinnest veneer of democratic legitimacy since its foundation because it has never really had much direct effect on the lives of citizens. It has been a preoccupation of elites, with glamorous international meetings to enthral politicians and civil servants, and constitutional innovations to intrigue lawyers. For the general citizen it offered mostly harmless or positive things: relatively easy international travel and the occasional new road. Perceived negatives, like the transfer of jobs from wealthier to poorer EU states, were often too diffuse to attribute directly to the EU. But now the imprimatur of the EU is directly associated with cuts to healthcare, salaries and pensions, massive youth unemployment and in some cases perceived national humiliation. All of this without any medium term end in sight, and all to be enforced by the European Commission and the ECJ. It is far from clear that the EU’s shaky political and constitutional legitimacy are capable of bearing the burden that the Fiscal Treaty would place upon them. If the Fiscal Treaty survives its initial Irish battle, the dubious constitutional politics surrounding it suggest that it might not win the war.

‘Well’, as the man said, ‘I wouldn’t start from here.’

Patrick O’Brien is a Research Associate at the Constitution Unit, University College London. 

2 Comments

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2 responses to “Patrick O’Brien: The European Fiscal Treaty: Constitutionalising ‘The Road to Serfdom’?

  1. Clare

    I would describe the EU as “Federal Communism”, as it carries the traits of both.. the democratic element does shine through now and then, it would however be inconceivable to maintain such a Union based on mere democratic principles, as we are talking about a lot of “demoi” (plural of “demos”, first part of the compound “democracy” or in Greek, “demokratia”), each with a will of their own.

    As for Ireland, we don’t really have a choice now, but still, bets are on an individual to challenge the Treaty, as with Crotty. Not the AG nor the President would ever play with fire, especially after the last challenge put on Greece a week ago, nobody would voluntarily risk being in their shoes; the Commission seems very eager to support any negative argument on the “will of the people” lately. The word that comes to mind is “dodgy”.

  2. Pingback: Stability, Coordination and Governance: Was a Treaty Such a Good Idea? | eutopialaw

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