Business, Finance & Economics

How important is this new EU treaty?


Another win for the Iron Chancellor.


Lionel Bonaventure

BRUSSELS, Belgium – The EU's new treaty certainly sounds important.

“It's a milestone in the history of the European Union,” said German Chancellor Angela Merkel as she signed up to the pact that obliges EU nations to balance their budgets.

In all, 25 leaders put their pens to the new treaty at a summit meeting Friday. They are hoping that it will avoid any repeat of the current crisis triggered by Greece, Ireland and Portugal running up huge deficits and debts.

"It's a strong signal that we have learned from the crisis, understood the signals and are banking on the future of a politically united Europe,” Merkel added.

More from GlobalPost: EU leaders sign budget discipline treaty

The promise of stability included in the fiscal compact treaty when it was first muted late last year has already given the European Central Bank confidence to pour a trillion euros into the European banking system. That move is widely credited with pulling the euro zone back from the brink of disaster as market pressure last fall threatened to send Spain and Italy the way of Greece.

The treaty also triggered a major rift in the EU, as skeptical Britain decided in December that it was staying out of the agreement to protect its economic independence. France and Germany fumed and declared London isolated in Europe, although the Czech Republic later decided to join the Brits.

Among the 25 countries still in, negotiations on the treaty moved fast. Despite concern that imposing such German-inspired discipline would restrict governments' flexibility in responding to future crises, they wrapped up in three months the text that bans countries from running up long-term deficits of more than 0.5 percent of annual economic output.

The next step could be harder. The treaty now has to be ratified by national parliaments, or in the case of Ireland, by voters in a referendum likely in the next three months.

The Irish have a habit of rejecting EU treaties, and taxpayers there are currently disgruntled over the burden of paying out over 40 billion euros over the next 13 years to cover the bailout of Irish banks back in 2009-2010 as the country slid into crisis.

Some Irish politicians have suggested that a little help from Europe in paying off those IOUs may be needed to persuade that the European treaty is good for them.

“People have made enormous sacrifices in terms of austerity,” Social Protection Minister Joan Burton told The Financial Times this week. “Relief in relation to the promissory notes would underline and emphasise once again the solidarity that Ireland has received from the euro zone.”

Previous Irish “no” votes have been a roadblock for EU plans because all members had to agree before they came into force. That won't be the case this time. The budget treaty rules were crafted so that it comes into force once 12 of the 17 eurozone countries have ratified.

More from GlobalPost: Will EU summit offer new hope for Greece?

The consequences of a “no” vote could be grave for Ireland since nations that reject the treaty will be unable to receive support from the EU's new 500 billion euro bailout fund, the European Stability Mechanism. That would likely rule out a repeat of the 67.6 billion euro rescue package which Ireland received by the EU and IMF in 2010.

France may provide a tougher challenge to the new treaty. Although President Nicolas Sarkozy is one of its biggest supporters, his Socialist rival and frontrunner in polls ahead of April's presidential election, Francois Hollande wants to renegotiate the pact to include more policies to get Europe's economy moving again.

“If nothing is done to complete and improve it, this treaty runs the risk of simply adding austerity and yet more austerity,” Hollande told a campaign rally Thursday in Lyon, France. “It ignores the essential, that is that growth and employment are what will allow Europe to regain confidence.”

Hollande's opposition to the treaty is the main reason Merkel is campaigning actively for Sarkozy in the French election. She knows that, if the rest of the euro zone could push ahead with the fiscal pact without Ireland, a demand from the French president for a re-negotiation would be impossible to ignore.

Sarkozy was upbeat in Brussels, insisting the treaty and other measures were pulling Europe out of the crisis. “Things are never 100 percent risk free,” he told reporters. “But I think we are turning the page on the financial crisis.”

Meanwhile, some economists wonder whether the treaty really is that useful, saying that its obligation for signatories to enshrine balanced budgets in their constitutions does little more than underscore similar commitments already included in recent EU fiscal rules.

More from GlobalPost: Greeks fear bailout will bring more economic woes

“The fiscal pact is not so important,” said Karel Lannoo, CEO of the Center for European Policy Studies, a Brussels-based think tank.

He contended that the treaty adds little new to existing EU agreements. However in a crisis where confidence, or the lack of it, has played a key role, the more EU leaders firm up their commitment to fiscal discipline, its seems the more chance that the markets may be starting to believe them.