PERSPECTIVE The Fiscal Treaty Needs a Protocol Extension to Include Economic Growth, Employment and Social Cohesion BJÖRN HACKER June 2012 The»Treaty on Stability, Coordination and Governance in the Economic and Monetary Union«, generally known as the Fiscal Pact or the Fiscal Treaty, is supposed to tighten up the budgetary regulation of the signatory states in comparison to the current provisions of the Stability and Growth Pact(SGP). At its core is the introduction of national debt brakes, subject to sanctions. Accordingly, the annual structural budget deficit may in future not exceed 0.5 per cent of nominal gross domestic product (GDP). After ratification by at least 12 of the 25 parties the treaty, signed at the beginning of March, is supposed to come into force by 1 January 2013 at the latest. How­ever, the firm stance taken by newly elected French Presi­dent François Hollande against the predominant Euro­pean approach to crisis management and his demand, made during his election campaign, for the renegotiation of the Fiscal Pact offer an opportunity to correct key de­fects and omissions. No Relevance to Coping with the Crisis The crisis has put the inadequacy of the Maastricht archi­tecture into stark relief. The one-sided emphasis on public debt has led to the neglect of the enormous problem of private debt levels. The hopes invested in self-adjusting economic structures have not been realised by the uni­fied monetary area. Instead, economic heterogeneity in Europe has increased, as the macroeconomic imbalances plainly show. This is due primarily to the lack of a common economic and fiscal policy, which would have a balancing effect and promote cohesion. Contrary to a European approach, the Member States, on surrendering the ex­change rate instrument, were abandoned to a down­ward competitive spiral of low wages, low taxes and low social spending. The Fiscal Pact entirely overlooks these blatant defects of the Eurozone. Instead, it concentrates exclusively on the regulation of state budget deficits and debt levels. No one denies that Greek financial policy has been funda­mentally unsound for years and that the country should never have been admitted to the monetary union. This description does not apply to the other crisis states, how­ever. Ireland and Spain, for example, complied with the Stability and Growth Pact in exemplary fashion right up until the outbreak of the global financial and economic crisis. Thus the stricter budget policy rules that are now to be implemented with the Fiscal Pact would not have prevented the current crisis. On the contrary, the poten­tially fatal effects on labour markets and growth of the putative remedy, austerity, are all too evident in southern Europe, and the states concerned are being driven into a vicious circle of ever increasing debt. Political and Economic Dynamite Spain’s deviation from the planned deficit target for 2012; the foundering of the Dutch government on its austerity programmes; and the self-evident results of the last two elections in Greece constitute the first indications of the dysfunctionality of an even stricter austerity policy. In the current crisis situation the Eurozone does not need inten­sified consolidation, but rather to break out of the cycle of crises using unorthodox measures to generate growth and employment. The procyclical consequences of the debt brakes to be established in all countries would have quite the opposite effect. There can be no question, either, of simply»exporting« Germany’s debt brake, anchored in the Constitution, to other European countries. For example, the German debt brake applies explicitly to the federal and state govern-