There are three ways to look at the European fiscal compact. One is to focus on the political implications for the European Union. To caricature, there is the "Has Cameron sold out Britain's interests?" issue. There is the "Will the Greeks and Portuguese put up with Germans ordering them about?" question. Et cetera.
The second approach focuses on the financial detail of what has been agreed. So the draft treaty requires countries to hold their deficits to 0.5 per cent of GDP over the long term and those with national debts of more than 60 per cent of GDP should cut that by a twentieth each year. On the other hand, there are things that don't seem to have been agreed yet, such as how the European Court of Justice will deal with miscreants, or how much the rules can be relaxed in exceptional times. And so on.
Both approaches have their place. The relationship between the national sovereign states and the EU is being rebalanced and if the agreement sticks – a big "if" given the failure of its predecessor, the Stability and Growth Pact of 1997 – that is of huge consequence.
Likewise, financial detail matters, too. The obvious question is: are the provisions too tight, thus threatening to plunge much of Europe into prolonged recession or at best very slow growth? My own greater concern is that it makes no sense to have a single set of fiscal rules for countries with very different demographic outlooks. Thus the deficit that Italy, with its falling population, can sustain is much lower than Sweden could manage, given its rising one. Just as a one-size-fits-all monetary policy has been shown to have grave flaws, so too will a one-size-fits-all fiscal policy.
So, nothing wrong with either approach; both are useful, even essential. But there is another perspective, which is to see it as part of a continuing process whereby major political leaders develop ways to correct major errors of economic management. Thus the Bretton Woods system of fixed exchange rates developed after the Second World War to correct the trade restrictions and competitive devaluations that exacerbated the depression of the 1930s. That broke down in the 1970s, which led to the great inflation. That, in turn, was tamed by controls over money supply and credit growth, which different countries developed in different forms. Giving central banks greater independence was the final twist to those reforms.
And now we have had a worldwide fiscal failure, which has been worse in some countries than others. Britain was unlucky to have a rigid and over-confident Chancellor, the US to have an ill-disciplined President. The EU was unlucky to have established its single currency during this period of fiscal failure. But we are where we are and now we have to do something about it. The developed world has to find ways to make sure that governments elected for four or five years run fiscal policies that are sustainable for – well, 40 or 50 years. If that seems a tall order, last week the UK issued debt to be redeemed in 2052. If you promise to repay someone in 40 years' time, it is reasonable to frame policies that take that timescale into account.
Our Office for Budget Responsibility is just one example of an attempt to create a framework in which politicians operate; Gordon Brown's golden rule was another, though it failed. We will have to see what the US comes up with, given that its previous efforts to create constitutional controls over its budgetary process have also failed. Europe's new fiscal compact is yet another attempt and we will have to see how well it fares.
But one way or another, the world will be forced to return to fiscal discipline, just as it had to return to monetary discipline, and rules curbing the politicians seem the least bad way to do so. The alternative is the random and capricious whim of the financial markets, egged on by the boffins at the rating agencies.
House prices still in decline
Since the recession was triggered by the collapse of US house prices, it is reasonable to believe that once the upturn comes to the housing market, the recovery will be secure. Reasonable, but I am afraid not encouraging. The latest Case-Shiller index for prices in the 20 largest cities shows a decline of 3.7 per cent in the year to end-November, with prices up in only Detroit and Washington DC. That is the seventh month in a row of declines; prices are now down one-third from their peak in 2006 and below their previous post-bubble bottom.
Here in the UK, the picture is broadly similar, though the peak-to-trough decline has been less marked. Last year, on Land Registry figures, prices were down 1.3 per cent, with the North-East faring the worst and London the only city seeing a rise. The Bank of England has just revealed that mortgage applications are at a two-year high, though people are paying back personal debt faster than ever. That is slightly encouraging: you borrow to buy a house but not for a holiday. But the message from both sides of the Atlantic is that things will be flat for some time yet.
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