Fiscal union

By today, the outcome of the latest EU summit held in Marseille should be known. The European leaders had gone into yet another all-nighter in an effort to reach a deal that will establish a fiscal union to supplement the monetary union.

Since the European debt crisis broke out, experts have been pointing out a crucial flaw in the monetary union experiment. A monetary union is an efficient arrangement. It reduces the costs of business transaction among members of the union, effectively creating a single large economy. It brings down the costs of borrowing for members because of the inherent strength of the European economies.

Without a fiscal union, however, there are great moral hazards in this arrangement. As we saw in the case of Greece, there is great temptation for individual national economies to borrow heavily at the uniformly cheap rates afforded all the Eurozone countries. Instead of exercising fiscal discipline, which is always unpopular domestically, there is great temptation to cover government overspending by borrowing.

The moral hazards that produced the debt crisis we now see might have been avoided had the Eurozone countries agreed on a fiscal union from Day One. A fiscal union, however, was not politically feasible a decade ago, when the single currency experiment commenced. Parliaments would have surely rejected the idea. Whole populations would have refused to ratify the monetary union if this was the conditionality.

In the light of present experience, however, it is now clear a fiscal union is indispensable. Not all the European leaders in attendance at the summit meeting are ready to buy the idea, however.

A fiscal union will require amending the basic charter of the EU. It will require amending some of the constitutions of the member-states. That, in turn, will require some form of ratification process in each member of the union.

Germany’s Angela Merkel and France’s Nicolas Sarkozy, representing the two economies that bore the greatest financial burden for bailing out the financially troubled southern European countries, are leading the effort to forge some sort of fiscal union. Merkel said, in no uncertain terms, that the monetary union cannot long survive without that fiscal union.

Europe’s best economic and financial minds have been hard at work trying to design mechanisms that will make each member economy accountable to the community for meeting standards of fiscal discipline. The monetary union is an unprecedented experiment; the fiscal union even more so.

At the bottom line, some means of enforcement must be made available to the European Central Bank to sanction countries unable to meet standards. That will surely further diminish the classical notions of sovereignty available to each EU country, including those such as the UK that chose not to participate in the common currency experiment.

The global markets expect a positive outcome from the summit, however. If not concrete steps are taken towards a fiscal union, the credibility of the euro cannot be restored.

Dishonest

Some of the anti-mining activists are using intellectual dishonesty to advance their cause.

They picked up aggregate data produced by economist Arsi Balisacan that shows an increase in poverty in the mining areas. Arsi himself disputed the reckless use of data from his poverty studies. The numbers need to be put in context to be meaningful.

It is true that there was an increase in poverty in the mining areas. A distinction, however, needs to be drawn between large mining enterprises that conform to the provisions of the mining law and the thousands of small, gold-rush encampments that attract a major flow of in-migration.

Look at the situation in Diwalwal, where gold is god and those with arms are kings. Here you basically have tens of thousands of people scratching the earth, sifting through the ore using the most primitive methods and dirtying the rivers for sheer lack of water treatment facilities. With gold prices hovering at close to $2,000 an ounce, even the Army could not establish order at this site where the world’s largest, purest single gold vein is found.

Compare that with the situation in, say, the Philex mines where housing is provided employees, the required containment and treatment facilities installed, schools and hospitals built for the surrounding communities and millions of trees planted to remediate the land as provided by law. Even in old mining communities such as in Toledo City where extraction was suspended because of all the policy troubles, residents are earnestly waiting for the resumption of mining operations. Their wellbeing depends on that.

It is simply unjust to lump together the highly organized, technologically adept and sufficiently capitalized operations of the major mining firms with the communal chaos, total lack of corporate governance and haphazard methods employed in the small-scale mining areas. That will mean lumping together the compliant with those where compliance simply cannot be enforced, the corporate with the impromptu, those with technology and those trying to extract minerals almost with their bare hands.

Doing so will only produce an unfair caricature of the mining industry that should never be the basis of policy.

Yet it is exactly on the basis of that intellectually dishonest caricature that the anti-mining fundamentalists, including the Ateneo School of Government, now clamor for a sweeping suspension of mining permits. If they get their way, that will be like firing a torpedo on our nation’s economic prospects, sinking business confidence on the stability of our policies and condemning our population’s wellbeing to the quagmire of ignorant populism.

Our mineral resources are a natural endowment for our people. Refusing to use them for our economy’s development is like renouncing riches and taking a vow of perpetual poverty.