It has been a particularly bad year for the EU, especially to the member states grouped under the unfortunate acronym of PIGS — Portugal, Ireland, Greece and Spain. They have witnessed budgetary deficit overruns, sovereign debt downgrades, massive government support for their financial institutions, and equally massive European support packages, mostly funded by Germany. More recently, other European countries such as France and even the UK seemed under pressure to fall into the PIGS camp, unless they carried out drastic domestic expenditure reforms that touch upon all aspects of national life.
With such public hostility, why would canny politicians put their futures at stake as voters have a long memory? Politicians seemed to be betting that the public’s collective anger and memory would be short lived, and that the measures agreed by the EU leaders now would avert even a more calamitous financial and economic crisis in the future. The basic framework of the EU agreement was simple enough: the establishment of a permanent fund to help the beleaguered euro in times of crisis, and, more importantly, to introducing new EU laws giving the EU the power to check on runaway national budgets.
Basically, the proposed new euro zone rules are designed to force EU countries facing budgetary over-runs to put their house in order first, and long before the concerned country starts to threaten the rest of the euro zone by contagion. A ring-fenced national economic austerity program seems to be the preferred first solution before EU assistance can be provided. This approach is the one desired by the EU’s largest bailer of distressed economies — Germany, but Britain’s new Prime Minister David Cameron has even gone further by arguing against a 5.9 percent rise in the EU’s own budget, by proposing a 2.9 percent rise.
Under the new permanent crisis resolution mechanism to safeguard the euro zone, EU officials will warn governments in the bloc about property and speculative bubbles and will be able to impose stringent fines on countries that borrow and spend too much. This permanent crisis fund would replace the temporary one established during 2010, worth 440 billion euros (SR2.3 trillion), and created to bail out Greece and support the shaky euro. Germany has insisted this time that the Lisbon Treaty will have to be amended to make the new emergency fund permanent and legally watertight, as the current Lisbon Treaty contains a clause banning members from bailing each other out.
However, once blocks grow as new and diverse members are added, so does the headache of obtaining consensus and unanimity. It took almost a decade and two referendums in Ireland to ratify the Lisbon Treaty .To add to this, the EU constitution, the predecessor of the Lisbon Treaty, was rejected by voters in France and the Netherlands. Politics is the art of compromise though and legal minds are feverishly working on setting up the fund without each of the 27 EU members' states having to ratify the Lisbon Treaty all over again. However, it seems that the recent Euro financial crisis and near insolvency of some EU countries has concentrated minds wonderfully, and there is grudging acceptance of the need to introduce such checks and balances on country spending to keep the EU project alive.
Can such a situation ever arise for the GCC bloc and what type of pressures might be brought to bear on errant members? While agreeing on a customs union, the location of the proposed GCC Monetary Council — the proposed forerunner of a GCC Central Bank — as well as freedom of movement of nationals and company establishment, to all intents and purposes the GCC bloc has not yet been tested in an economic crisis like the EU. The establishment of a GCC monetary union and single currency by 1 January 2010 came and went with no such currency in sight, and imbalances faced by some member states such as Dubai’s debt bailout was carried out by Abu Dhabi and not through a GCC wide emergency fund. Policy convergence on inflation rates, fiscal deficits and level of government debt in the various GCC countries, while converging, are still not in compliance with one another, if strict Maastricht Treaty parameters are used.
For the time being, the GCC countries will continue to build their national economies at their own pace and financial resources and are mercifully shielded from the need for establishing strict guidance for bloc intervention should a member break bloc budgetary spending rules. This can only happen if a unified GCC currency emerges which could cause problems for all the bloc if one member breaks the rules. That day is still a long way off for the GCC...