Why the Fiscal Compact is, legally, null and void: Interview by Giuseppe Guarino

fiscal compact nooseIn this fascinating interview, published in Corriere della Sera on 29th October 2014 and reproduced here in English, Professor Giuseppe Guarino, a former finance minister of Italy, argues that the Fiscal Compact never had a legal leg to stand on. Additionally, he also claims that, legally, the 3% deficit limit (in the Maastricht and later the Lisbon Treaties) was merely a ‘reference value’ and, under no circumstances, a ‘rule’. Professor Guarino suggests that European leaders have a unique opportunity to remove this ‘noose’ around our nations’ necks by revealing the Fiscal Compact’s, and the 3% so-called rule’s, true legal status (or absence thereof).

Professor Guarino, you have made a life creed of law and the observance of the rules. As a university teacher, as a lawyer, and also as Deputy and Minister, you have always gone beyond what seems to be taken for granted. What is your reaction to the positions that Prime Minister Matteo Renzi has taken with respect to the European Union?

Mr. Renzi, to some extent unwittingly, has made some truly extraordinary achievements.

Such as?

There are quite a few. Let me cite just the simplest one. On January 1st, 1999, when the “euro” envisaged by the Maastricht Treaty on European Union was to be introduced to the market, in its place there was launched, under the same name, a currency subject to a diametrically opposed set of rules. By Regulation 1466/97, an act that, theoretically, has no power whatever to modify a Treaty, the Commission imposed upon the member states the obligation of budgetary balance in place of the objective of “sustainable growth”. Countries with budget deficits were required – with no possibility of exemption – to achieve a balanced budget in the medium term, along a path that the Commission would assign individually to each country. Imposition of balance of deficit countries is tantamount to eliminating the ability to borrow, to create debt.

Mr. Renzi has had it recognized that for purposes of assessing Italy’s budget position the reference value will not be nil but the 3 percent indicated in Protocol 5 to the Maastricht Treaty. Implicitly but unequivocally, the Commission has acknowledged that the rule in force is not that of the Regulation but that of the Treaty. The imposition of budget rigor starting in 1999 constituted an illegal act. As a consequence the European Union must answer for it. José Manuel Barroso bears the primary responsibility, as he was President of the Commission for two consecutive terms. Renzi is absolutely right when he says “At least have the decency to be quiet.”

The fact is that in getting the Commission to agree that for Italy excessive deficits shall be assessed with reference to the base value of 3 percent rather than zero, at one stroke Mr. Renzi has managed to scrap Regulation 1466/97, its two successor regulations (1055/2005 and 1175/2011), the so-called “Fiscal Compact” and all the decisions made to for their implementation.

So a second question arises – whether the 3 percent ratio is to be applied rigidly or with some margin of flexibility.

The 3 percent deficit ceiling has never been in force. The Treaties (Article 104C and Protocol 5 of the Maastricht Treaty, and now Article 126 of the Lisbon Treaty on the Functioning of the European Union) define its nature and function precisely. The 3 percent ceiling is not a limit on borrowing but merely a “reference value”. The way in which this value is to be applied is determined by those articles, which provide that the 3 percent limit can be legally exceeded in the presence of events beyond the control of the national government; and for as long as the constriction produced by this force majeure persists. It’s hard to imagine a worse case of force majeure than what we have had since January 1999, when the Commission itself imposed the no-deficit constraint, which compelled the member countries not to grow but to languish. So that today, after fifteen years of violent maltreatment, instead of growing economically these nations find themselves reduced to conditions equivalent to those of twenty or thirty years back.

What suggestions do you have for the Italian government and those of the other euro-zone countries?

They have to be on the qui vive. No bureaucracy readily relinquishes powers that it has appropriated. And this applies in particular to the European bureaucracy, which is the world’s costliest and operates in the absence of a true European government. The bureaucrats will miss no opportunity to turn the situation back to their advantage. And we already have proof of this. In presenting the Commission’s position with respect to Italy, it is asserted that the passage of the budget law depends on the enactment and the rapid and effective application of “structural” reforms. But the term “structure” or “structural” is totally foreign to the Treaties. If in the course of an excessive deficit procedure pursuant to Article 104C of the Maastricht Treaty (now Article 126 of the Lisbon Treaty) the existence of an excessive deficit should be found, at the most the violator could be subjected to a suitably large pecuniary sanction. This has never happened. And in fact, it is hard to see how a country that is in violation for lack of resources and of growth could right its finances if burdened, in addition, with a hefty fine. France, whose public finances would seem to be even more precarious, does not appear to be the least bit worried about possible sanctions.

 One last question: have you too now become a Renzi supporter?

If Matteo Renzi did what this interview calls for, I would certainly not call him a “Guarini supporter”. To European citizens and governments, member states of the EU and of the euro-zone especially, I say that the course of historical events has taken away our freedom, shut us in a cage. Anyone who offers a key to get us out is to be appreciated and helped. Only when we are all back outside, in the open air, can we re-institute our old values and encounter the principles that have accompanied Europe in its long, glorious history.

One final observation. The scrapping of the principle of budget balance that Renzi has provoked offers a unique opportunity. The principle of rigor, fiscal austerity, has triggered a generalized intolerance. Italy can be the leader of a European uprising. If this opportunity is missed, we are not likely to get another such chance any time soon. The relevance of this issue is not restricted to Italy, or even to the European Union. The global balance itself is being thrown out of kilter, and in the last few weeks the International Monetary Fund has been paying greater attention to the question. In my essays on the “Truth” about Europe and the euro, I have provided the statistical data that underpin what is now a dramatic forecast.

 

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