BRUSSELS  - Europe’s efforts to seal a new pact to deepen economic integration was dealt a setback even before it comes to life after Standard & Poor’s warned that the treaty may lead to self-defeating austerity.
European Union leaders agreed after a tense summit last month to write a new pact to toughen budget discipline across the bloc, with Germany leading the charge for stricter policing of spending after years of toothless oversight. One day after S&P downgraded a raft of eurozone countries, German Chancellor Angela Merkel said Saturday that the fiscal pact needs to be implemented quickly.
“The decision confirms my conviction that we in Europe still have a long road ahead of us until investor confidence is again restored,” she said.
The aim of the pact is to convince the markets that the eurozone can prevent a new crisis like the one that has forced Greece, Ireland and Portugal to take bailouts and is driving Italy and Spain to the edge.
But after downgrading the credit score of nine of the eurozone’s 17 states on Friday, including stripping France and Austria of their triple-A ratings, S&P voiced doubt about the effectiveness of the pact.
The new treaty, which EU leaders hope to sign by March, “has not produced a breakthrough of sufficient size and scope to fully address the eurozone’s financial problems,” S&P said.
The pact is based “on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone,” the agency said.
To S&P, the eurozone’s problems “are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called ‘periphery’.”
Negotiators this week reached an agreement in principle on the “fiscal compact,” which demands that governments write into their constitutions a law requiring balanced budgets.
The pact would make sanctions against governments that violate budget rules more automatic, after most countries ignored for years EU rules limiting public deficits to 3.0 percent of gross domestic product.
But S&P warned that “a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”
The pact has also deepened divisions in the EU after Britain refused to join the effort, leaving London isolated while the bloc’s 26 other members seek to tighten their union.
The eurozone is struggling on other fronts in its battle against the crisis.
Governments are having trouble boosting the firepower of the eurozone’s bailout fund, while talks between Greece and bank creditors on a huge debt writedown have stalled.
Sony Kapoor, head of the Re-Define economic think tank in Brussels, said the S&P announcement was “more a downgrade of the eurozone’s management of the crisis.”
“Perhaps this will now concentrate the minds of EU policymakers, making them realize that no country is immune to being pulled down by the euro crisis,” he said.
“S&P had given EU leaders fair warning but they have wasted the month they have had to change course and come up with a credible crisis resolution strategy.”
The pact has its share of critics within the EU, with some nations warning that the focus should also be on measures to spur growth amid signs that Europe will plunge into recession this year.
“This treaty story is insane,” a senior European official said recently on condition of anonymity, adding that it was only Merkel who asked for it in order to satisfy German public opinion and the conservative majority in parliament.
In return, other Europeans are counting on more help from Germany, Europe’s top economy and main contributor to the bailout fund.