World, As Seen from the most beautiful islands: Ireland and Cyprus

The European budgetary rules: arbitrary and counterproductive


The proposal on the new European budgetary rules must be returned to the drawing board. It is absolutely crucial that there is more investment again.

A financial crisis and a Euro crisis dominated the first half of the previous decade. In response, extensive budgetary rules were implemented, which barely led to a reduction in government debt. The main reason? The rules hinder growth. The European Commission is now proposing new rules. Despite some positive aspects of the proposal, we must ensure that history does not repeat itself.

Why do we need European budgetary rules in the first place? Contrary to what one might think, the creators of the Euro were not afraid that they would have to lend each other money. The founders were primarily concerned about fiscal dominance: that excessive government debt would drive up inflation because the independence of monetary policy would be constrained.

The chosen magic numbers are completely arbitrary: the government debt of each member state must remain below 60% of GDP, and the budget deficit cannot exceed 3%. The 60% was the average debt burden of the founding member states, while the 3% was meant to facilitate convergence towards that 60%. In reality, the reason is more mundane: the French officials who came up with the 3% figure based it on the French deficit and found it to be a harmonious number.

Fiscal dominance turned out to be an illusion, especially after the money supply doubled from the ECB’s zero interest rate policy since 2010, without any significant effect on inflation. This does not mean that rules are unnecessary, but for a different reason: because the insolvency of one member state inevitably becomes the responsibility of the others.

Then came the euro crisis. Contrary to what someone like Geert Noels would have you believe, the euro crisis had little to nothing to do with member states throwing the money out of windows and doors. Spain, Italy and Ireland had no primary deficits before the financial crisis, unlike Greece. The euro crisis was therefore not a debt crisis, but a crisis of the architecture of the Eurozone.2 while some countries posted serious surpluses, others built up deficits. They were interdependent.

Countries like Germany had built their economic model on trade surpluses relative to foreign countries. The countries in the periphery previously had a model based on wage and consumption growth. The German model consisted of a policy of budget surpluses, low wage increases, low investment and low inflation. Thus, the economy did not grow by increasing productivity, but de facto by exporting unemployment to neighboring countries. This beggar-thy-neighbour policy was not such a problem when the Deutsche Mark still existed: every so many years there was a revaluation against the other coins, which corrected the imbalances. The euro, which was relatively too weak for the German economy, put a turbo on that model – and thus on the drifting apart of North and South.

Written by: Harry Adams

Harry Adams is a political expert who has been working for various publications under pseudonyms for 11 years. He loves sarcasm and a rigid presentation of the material without decorations.

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World, As Seen from the most beautiful islands: Ireland and Cyprus

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