The European fiscal compact which calls for EU countries to stay within the Maastricht treaty government deficit hurdle of 3% of GDP has already been signed off on by all 27 EU governments except the United Kingdom and the Czech Republic. This agreement calls for countries that fail to meet their deficit targets to lose some national sovereignty on budgeting issues and accede to EU oversight.
However, to formally ratify the fiscal compact, Germany needs a two-thirds majority of the Bundestag and Bundesrat to sign on. This is where the domestic problem for Angela Merkel lies. As her party has lost representation in the Bundesrat due to poor performances in state elections, Merkel must agree to compromises with the SPD and Green/Buendnis 90 parties as well as with her CSU and FDP coalition partners. Here are the some of the SPD Green party talking points.
On fiscal discipline, the Green Party is drawing the same line that the whole of the German mainstream political spectrum does. They believe fiscal discipline is important. However, they also stand behind the growth compact now being discussed on a European level. They have proposed two specific agenda items:
- Infrastructure bonds. The Green Party supports the infrastructure euro bond idea that is now being bandied about. So far, the funds associated with that seem to be small beer but the goal is to have the EIB or some other European entity issue bonds that will support specific European infrastructure projects. This issue looks like a done deal as Merkel’s government has said they are not opposed to it because the funds are allocated to specific purposes and not for general use. The official line that the German government, then, seems to be taking is that their opposition to euro bonds stems from an opposition to jointly funding general European government expenditure. If expenditures can be specifically identified and carved out, then the Germans would not be against funding them via pooled European-wide sources.
- Maastricht compliant carve out. The Green party is now talking up an idea whereby the debt within each euro area member state that is under the 60% debt to GDP hurdle be carved out for joint indemnification. I have heard about this idea before but have not received enough specifics to know how this is going to work. However, the general idea is that the problems are with countries being over the Maastricht treaty hurdles on debt and deficits. All debt under the 60% Maastricht debt hurdle is then fair game for joint indemnification. Note that the Germans also are over the 60% hurdle with a debt to GDP ratio of 82%. So they would only be able to get 60/82nds of their debt pooled under this plan. The goal here is to stop countries being beholden to market ‘speculation’ and reduce the coupon paid on all Maastricht compliant debt so that at least this debt has a low coupon for the countries in the periphery.
These are just talking points of course but they are couched in language that is difficult for Merkel to counter. The Maastricht compliant carve out language about ‘speculation’ is a particularly good play because the Merkel government has complained bitterly about market speculation and hedge funds creating the sovereign debt crisis.
When asked specifically about the juxtaposition of closing deficit gaps for fiscal discipline and increasing spending for infrastructure projects, the Greens have punted so far. They have fallen back on the "medium-term" language inherent in the fiscal compact. Right now the fiscal compact reads that governments will present plans for medium-term debt reduction. And so the Greens believe the infrastructure bonds as part of a growth compact fall under this guise.
For their part, I am hearing that the SPD party is talking about making their support for a fiscal compact contingent on a bank transaction tax being implemented. This is something the UK government has voiced opposition to and has no chance of being implemented at the European level. So my understanding is that the SPD want Germany to implement this at a German level as a precondition for their signing onto the fiscal compact.
When I get more details I will provide them.