Euro fiscal union splits government

Questions arise whether increased budgetary discipline would stop government’s stimulus plan

The Danish government has not ruled out joining the new European fiscal compact treaty that was agreed last week by the EurozoneÂ’s 17 members, though some economists and politicians worry the plan could inhibit EuropeÂ’s economic growth.

The fiscal compact treaty is designed to increase budgetary discipline and prevent Eurozone members from suffering the spiralling debt problems that are currently plaguing countries such as Greece and Italy.

“The treaty is about reinstating trust in the euro. In order to create growth and jobs, we need to get the euro under control. That’s where it starts,” PM Helle Thorning-Schmidt said at her Tuesday press conference.

So far the UK is the only EU member state to have pulled completely out of negotiations after it was not given any guarantee that its London-based financial sector would be protected.

But concern about the wider effects of the treaty have also been voiced in Denmark. Villy Søvndal, the foreign minister, told TV2 News on Saturday that it could inhibit Denmark’s growth stimulus package.

“There are some parts that will be very difficult for Denmark,” Søvndal said.

The caution expressed by Søvndal seemed to contradict remarks made by Margrethe Vestager, the minister for the economy and interior, and Thorning-Schmidt, who both stated after last week’s deal was struck that the government would consult legal experts and parliament before coming to a decision.

Søvndal’s concerns lie in the diminished budgetary control that Denmark would have to accept in order to join the treaty. One of its main points would be a requirement that governmental budgets either remain balanced or in surplus, and that governments who breach a three percent budget deficit would face automatic penalties.

“It’s clear that it will limit our budgetary freedom,” Bo Sandemann Rasmussen, an economics professor at Aarhus University, told Berlingske newspaper. “The downside is that we won’t be able to keep as large a deficit as we would like. The advantage, on the other hand, is that it sends a clear message to the markets that your government is putting forward healthy policy.”

But while budget discipline might assure the markets, it might prevent the Danish government from carrying out its promised economic stimulus package, or ‘kickstart’, in which planned public infrastructure investments are intended to create jobs and growth.

On Tuesday, Søvndal explicitly told journalists that Denmark would have difficulty joining the fiscal compact treaty unless the government’s ability to invest in its economy was respected.

“Two things are essential for us: one is full respect for our euro opt-out and the other is that we can proceed with our kickstart as it is laid out in the common governmental policy.”

Søvndal’s party, Socialistiske Folkeparti, is the most EU-sceptical of the three government parties, sitting in stark contrast to the centrist and pro-EU Radikale on many Europe-related issues.

Should Denmark be perceived to lose any more sovereignty to Europe, while also being prevented from enacting its economic stimulus – a policy high on the government’s priority list – SF’s position in government would be seen to be massively weakened.

But at TuesdayÂ’s press conference, Thorning-Schmidt argued that Denmark would still be able to boost the economy while also following tighter budgetary guidelines.

“Do we have the opportunity to kickstart the economy? Yes we do, if we follow a responsible economic policy. It’s not up to the EU, it’s up to us,” Thorning-Schmidt said.

Should the government decide that joining the fiscal compact treaty would not prevent their stimulus from going ahead, they still face the challenge of whether joining would mean a loss of sovereignty, in which case a referendum would be required.

Opinions on this issue are split, with Peter Nedergaard, an EU expert from Copenhagen University, telling Jyllands-Posten newspaper that he did not think it was likely.

“The question will be whether it will mean giving up sovereignty from a constitutional point of view,” Nedergaard said. “The most likely scenario is that the Justice Ministry will reach the conclusion that it doesn’t.”

Thorning-Schmidt also dismissed the likelihood of a referendum on Tuesday, despite pressure from parties such as Dansk Folkeparti and Liberal Alliance to put it to a vote.

“I have a hard time believing that it will lead to a referendum,” she said.

Regardless of whether a referendum is deemed necessary, a study published this week in Jyllands-Posten showed that 53.9 percent of Danes want to be consulted on joining a new treaty.

And while 45.1 percent of Danes felt that Denmark ought to join, only 22 percent thought it would lead Europe out of its economic crisis.

Scepticism about the success of the plan has been growing, with former PM Poul Nyrup Rasmussen telling Information newspaper on Tuesday that he was disappointed the plan made no effort to stimulate growth.

“I think the deal is too small in that it does not even consider how to get Europe moving again,” he said. “First and foremost, we need to get green growth moving and create new jobs. There is no mention of this in the plan as it stands now.”

EU president Herman Van Rompuy said this week that the fiscal compact treaty would be signed in early March at the latest. Denmark will take over the EU presidency on January 1.