The Happy Marriage of Budgetary Discipline and Growth – Regional Views

In February my colleague Kārlis Bukovskis wrote a piece about “Euro-Kaputt” after agreement had been reached by 25 member states about future budgetary discipline.

I want to develop this topic from a different angle, because, in order to promote better understanding about issues relating to the EU “Fiscal Compact” (namely the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, to give it its full title), Latvia’s Parliament’s European Affairs Committee in cooperation with the EU Commission Delegation in Riga and others, recently organised a couple of discussion meetings about the pact. On 26th March the discussions included Chairpersons of the European Affairs Committees from Estonia, Lithuania and Poland thereby providing wider regional insights into these issues. In addition the conference, held in Latvia’s Saeima, married up the question of growth with fiscal discipline.

The first discussions took place in February before the signing of the pact at the European Council meeting at the beginning of March. My remarks will essentially focus on certain aspects flowing from the more recent discussions amongst the regions’ parliamentarians.

In spite of regional differences amongst the Baltic countries and Poland on monetary policy, (with Estonia in the eurozone for over a year, Latvia and Lithuania aspiring to join in 2014 and Poland not yet proposing a clear date for entry) there seems to be consensus that measures relating to budgetary discipline provide the pre-conditions for growth. “We agreed that responsible fiscal discipline is the basis for growth”, said Latvia’s hostess, Zanda Kalniņa-Lukaševica.

All four countries appear committed to ratifying the pact even though Autumn elections could affect an early ratification in Lithuania. Latvia’s rationale for signing up to the disciplines provided by the pact is to ensure that we remain amongst the core countries when it comes to decision making. In any event, presumably our aspirations for joining the eurozone in 2014 would be in jeopardy if we were not committed to early  ratification.

Austerity and growth should be seen as one side of the same coin, rather than opposites. This was the view of Taavi Roivas from Estonia’s Parliament, who pointed out that the measures provided by the pact have, in Estonia’s case, been regarded as good for the countries inhabitants during the last 20 years and therefore will not be regarded as something “imposed” by Brussels. He also rightly reminded the audience that the current crisis is not a eurozone crisis, but a sovereign debt crisis affecting some eurozone countries, as well as some countries outside the zone.

There is perhaps some justifiably healthy scepticism as to whether once in force, the provisions of the pact will be enforced. Professor Ozoliņa of Latvia’s University pointed out that the EU has no problems drawing up sound treaties. But, as we well know from what has happened with the famous Maasticht criteria (which form the basis  for the discipline contained in the pact) implementation often leaves a lot to be desired, with rules being broken to fit political necessities. Will the same happen with the Fiscal Compact or will implementation be enacted through the penalty clauses by way of member states being referred to the Court of Justice? We won’t know the answer until after the pact has entered into force and been up and running.

Economists can no doubt argue long and hard about how growth can be achieved. Given that within the EU, the member states of the Baltic region have recently shown excellent progress for GDP growth, we must be doing something right. In this context the use of EU funding will continue to play a crucial role, which is why Latvia has prioritised cohesion funds and direct payments through CAP as the major issues in discussions on the next EU budget period (2014 – 2020). However it will be crucial to elaborate clear priorities that have strategic, rather than short term goals. The mechanisms for achieving this are falling into place, given that Latvia’s government is now adopting the National Development Plan (NDP), which will in turn form the basis for discussions with the Commission on the goals that we will be seeking this year within the EU2020 strategy. The headline goal for the NDP is “the economy’s sprint”. The more specific goals are defined in the plan itself.

In any event, in Latvia the prevailing circumstances for continuing growth are positive. Competitiveness has now been improved thanks to the reduction of employees in the public sector during the recent crisis. Inward investments have increased during the last two years, whilst there has been a growth in exports. But of course this optimistic outlook needs to be tempered by the potential problems being faced both in Europe and at the global level.

During their sojourn in Rīga the Baltic and Polish European Affairs committee leaders agreed on their respective Parliaments’ approaches for achieving growth. They were defined as improving the Single Market, with an emphasis on integrating financial markets and services. These were seen as areas that would in parallel also provide new employment opportunities. This regional consensus will now need to be promoted amongst other EU member states.

Further economic integration through the disciplines offered by the Fiscal Compact is the quid pro quo for 25 member states of the EU. For the UK and the Czech Republic, their efforts at achieving growth will be maintained without the marriage to budgetary discipline.