10/14/2012 02:57 pm ET Updated Dec 14, 2012

The European Budgetary Pact

Austerity versus public interest: a plan destined for failure

The socialist government of François Hollande has adopted, through French parliamentary procedure, the European Budgetary Pact, also known as the Treaty on Stability, Coordination and Growth (TSCG). This measure, in addition to establishing a policy of ongoing austerity, will affect adversely the autonomy of the nation, which will no longer have the power to decide independently its own national budget.

The Treaty on Stability, Coordination and Governance (TSCG), imposed by Angela Merkel's Germany and adopted at the European level, introduces the so-called "Golden Rule," something that has become obligatory for all members of the euro zone. It also establishes a de facto policy of austerity that prevents signatories from submitting a budget that includes a deficit of more the 0.5% of the gross domestic product.

Adopted on March 2, 2012, by Nicolas Sarkozy and 24 other European leaders, the TSCG has been submitted to a French parliament dominated by the Socialist Party. The passage of the treaty required only a simple majority vote of both chambers, however no modifications may be made to it. The Golden Rule has thus become law and prohibits any deficit, under penalty of severe sanctions from the European Union.

Worse yet, France has lost much of its sovereignty with the TSCG. Indeed, the French Parliament will be required to submit its annual budget to the European Commission, the members of which have not been elected by universal suffrage. The Commission can then make trade-offs as it deems necessary, thereby deciding the future of the nation without being accountable to its citizens. Thus, the TSCG mandates austerity policies in Europe, without the possibility of alternatives being explored.

France, a country that is on the verge of recession, should by any logic be injecting money into the economy. Returning to a balanced budget imposed by the TSCG, which involves accepting a 3% deficit in 2013, means that 33 billion euros to be redistributed by the state will need to be withdrawn from the national economy. This is a valid path only if the assumed growth of 1% for the year proves to be correct, something that is yet to be demonstrated. It also assumes that the State will need to reduce public spending, an action that will inevitably have a serious social impact.

Similarly, returning to a balanced budget by 2017, as Hollande has pledged, means withdrawing 60 billion euros that would otherwise circulate the economy. This figure is equivalent to half of the Recovery Plan's 120 billion euros (less than 1% of the European GDP) adopted by the European Union to stimulate growth for all countries in the eurozone.

The official role of the European Stability Mechanism (ESM) is to come to the aid of those countries that find themselves in difficulty. It is nonetheless intended only for nations that have adopted the TSCG. In reality, the proponents of neoliberalism, the symbol of which is Angela Merkel, devised the ESM as a means through which they might impose austerity policies, an action that in addition to causing serious social consequences for the populations involved is economically inefficient.(6)

Indeed, wherever austerity plans have been implemented, whether in Greece, Italy, Ireland, Portugal or Spain, the debt crisis, far from diminishing, has worsened and living conditions of the populations have deteriorated considerably. This deterioration has been accompanied by an explosion in unemployment and the organized destruction of the social welfare system and the welfare state.

The most emblematic examples are Greece and Spain, where these shock treatments have been imposed by force. The results are catastrophic from the political, economic and social point of view.

In Greece, after the application of nine austerity plans, we witness a massive increase in taxes including the VAT as well as higher prices and lower wages (cuts up to 32% of the minimum wage!). Retirement benefits have also been reduced and the legal retirement age has been raised. Essential public services, such as education and health care have been destroyed and welfare has been eliminated. Strategic sectors of the national economy (ports, airports, railways, gas, water, oil) have been privatized. Production has fallen by 20%, unemployment has soared and the debt crisis has only worsened. Indeed, it is now higher than it was before the intervention of international financial institutions in 2010.

After the Greek disaster, which was caused by the austerity policies of the Troika (the European Central Bank, the European Union and the International Monetary Fund), Spain in turn finds itself at the edge of the abyss. The same neoliberal shock therapy has been forcibly applied to the Spanish people, with the same disastrous consequences. According to the economic journal, La Tribune, the government of Mariano Rajoy has imposed upon its citizens' "a colossally rigorous austerity plan" that includes a projected 102 billion euros in spending cuts by the year 2014, a drastic reduction in the number of government workers, budget cuts in education and health, lower wages, higher taxes including the VAT, as well as a reduction in family allowances, unemployment benefits and pensions, among other draconian measures. All of this in a country hit by a record unemployment rate of 25% and an explosion in its poverty rate. For its part, the European Commission, far from being concerned about the social and human consequences caused by these measures, "welcomes the adoption of the multi-annual plan in Spain."

The TSCG, which imposes austerity policies as the only possible standard, is doomed to failure and inevitably worsens the economic crisis in a Europe that is already in recession. Indeed, the concept of the Golden Rule is dubious since reducing the ability of states to borrow deprives them of any opportunity to make investments that would boost growth. The disastrous social consequences will inevitably result in a major political crisis, the outcome of which no one can predict, and all this within the context of a resurgence far right across the continent.

The socialist government of François Hollande refused to submit the TSCG to the people by referendum. This is a violation of democracy in France, a country already badly shaken by the adoption by parliament of the Lisbon Treaty in 2007, something the population had rejected by referendum two years earlier.

[1] Union europénne, « Le Traité sur la stabilité, la coordination et la gouvernance », 2012. (Site consulted August 29, 2012).
[2] Ibid.
[3] Ibid.
[4] Jean-Luc Mélenchon, « Discours de Jean-Luc Mélenchon en clôture des estivales citoyennes du Front de Gauche », Le Parti de Gauche, August 26, 2012. (Site consulted August 29, 2012).
[5] Ibid.
[6] Conseil de l'Europe, « Mécanisme européen de stabilité », 2012. (Site consulted August 29, 2012).
[7] Comité pour l'Annulation de la Dette du Tiers monde (CADTM), « Le CADTM dénonce la campagne de désinformation sur la dette grecque et le plan de sauvetage des créanciers privés », March 10, 2012. (Site consulted 29 April, 2012).
[8] La Tribune, « L'Espagne s'impose un plan de rigueur colossal », August 3, 2012.

Salim Lamrani, Docteur ès Études Ibériques et Latino-américaines at the University of Paris Sorbonne-Paris IV, is associate professor at the Université de la Réunion and a journalist who specializes in relations between Cuba and the United States. His latest book is État de Siège: Les sanctions économiques des États-Unis contre Cuba, Paris, Éditions Estrella, 2011. (Prologue by Wayne S. Smith and preface by Paul Estrade).

Translated from the French by Larry R. Oberg.