To cleanse Europe, dismantle the Stability Pact!

To cleanse Europe, dismantle the Stability Pact!

March 12, 2019 0 By Michel Santi

Europe’s not out of danger yet. A meltdown is still on the cards due to the eurozone members’ lack of any control over their interest rates and currency. In fact, in these conditions, how can diverse national economies using the euro not diverge? And what would be the instrument that could harmonise consumption and economic activity? Also, what can be done to avoid the often massive gaps in competitivity that can, as we have seen, only be resolved with sacrifices?

It would of course be desirable to implement a counter-cyclical budgetary and fiscal policy stance that would iron out the creases and fill in the gaps between the North and the South, between the core and the periphery. This eventuality, however, gets a disdainful slapping-down: by ignorance of macroeconomic mechanisms, but also because of a moralising attitude that demands that the insufferable profligates be whipped into line…despite them having greatly contributed to the North’s prosperity and its banks at the turn of the century. It’s this stubborn refusal to use certain instruments at hand, this willingness to inflict a good “correction” on the ill-disciplined that have shaped the obsession with deficits and the politics of austerity, that have in turn ravaged the European Union and consequently allowed populism to prosper.

In fact, Europe’s breakdown was borne from the “every man for himself” ideal that came about precisely because of the Stability Pact. Wasn’t honour ensured as long as the infamous criteria were adhered to? The obsession with these figures, aided by the symbolic power of the 3% criterion, was in fact so powerful that its immediate consequence was the prevention of all qualitative analyses of public accounts. This is why the launch of the single currency was the starting block for disastrous imbalances and competitivity gaps between nations, or blocs of nations, or members. There have been so many seeds of discord, speculative bubbles gestating, and so much dysfunction that it would have been easy to reduce and regulate the figures with a harmonious and coordinated common budgetary and fiscal policy stance. It’s not the PIIGS (Portugal, Italy, Ireland, Greece, Spain) excesses, nor their poor management, that caused competitivity gaps, imbalances and deficits that were then condemned by the North. No, because the very first asymmetric shock that struck the euro and its member states was the natural consequence of the creation of the euro, in it’s current form.

Hadn’t the euro been directly preceded – and followed – by a widespread drop in interest and funding rates for the peripheral countries? This convergence could only have occurred thanks to the financial markets’ aberrant belief that the risk carried by the South didn’t differ much to that carried by Germany. From then on, cash flowed toward these nations that de facto had a largely expansionary stance of monetary policy. So on the top of destabilising monetary conditions, these countries were gradually inundated with cash to an extent that was diametrically opposed to the conditions that reigned before they were integrated into the euro.

Fundamentally counter-cyclical budgetary and fiscal policies should have been put in place by the peripheral European nations, with the aim of offsetting the perverse effects of massive monetary stimulus. In these conditions, the shock in demand that took place in these countries came at no surprise: consumption soared there, with the consent and blessings of Germany whose trade balance had been enjoying superhuman surpluses from the year 2000 onwards. Without wanting to minimise the manifest structural problems inherent to each of these peripheral European nations, it is the sequence and combination of these shocks – expansionary monetary policy and hyperbolic aggregate demand combined with largely insufficient fiscal offsets – that inflated wages in those nations proportionately to productivity. It is very important to make the point that many peripheral countries in Europe would have been hit by recession by 2010 anyway, with or without the euro crisis. The European Union’s original sin is therefore precisely and notably this Stability Pact, that distorted the idea of fiscal discipline.

In fact, by focusing all their attention and efforts on respecting or trying to respect the Pact, successive governments let precious counter-cyclical policies pass them by. By centring their efforts solely on the fight against public deficits in order to satisfy it, and thanks to public accounts in surplus for many of the southern nations, the leaders neglected to make use of the fiscal driver that would have calmed excitement, moderated speculative clamour and kept overspending in check. So why would these countries have put in place such policies that led to a downturn in their growth rates, when even their debt to GDP ratios greatly improved between 2000 and 2007 ? After all, because of this very same Stability Pact that they were honouring, no pressure was put on them to implement measures in order to contract their economies. This Pact therefore totally clouded the vision and judgment of our authorities, who played only by the rules of the criteria, and measured all their respective national economic data and statistics through the lens of these criteria. And far away from any critical mindset, any qualitative analysis, or any basic macroeconomic forecast. 

The euro’s original sin has therefore led the political and economic leaders of the different member states to focus all their attention on the quantitative, that is to say on these infamous criteria that were mostly adhered to in many of these nations. In fact, why bother with qualitative analysis when accounts are in surplus? And why rack your brains over macroeconomic data if the sacrosanct Pact is being respected? In the case of Spain or Ireland it would have been easy to recognise that the budget surpluses these two countries were enjoying were pretty much compulsory – even a mechanical consequence – in times of booming property markets. By emphasising the point of budget surpluses, the Pact thus made us look in the wrong direction and analyse the wrong indicators.

These are exactly the same terrible mistakes that are being repeated today. By concentrating their sights solely on countries’ deficits, the European authorities seek the luxury of not being required to come up with any sort of counter-cyclical fiscal policy stance, whose objective and effects would be to restore growth. While the use of taxation to moderate overheating economies was ignored upon the euro’s creation, this same driver is still being ignored now even though it would have the power to neutralise recessions. Since our leaders are elected politicians and are therefore logically preoccupied with getting re-elected, since they are hardly specialists or totally ignorant in macroeconomics, and since it is not within the European Central Bank’s remit to plead in favour of this or that fiscal measure in whatever country, it would be ideal if the European Union were also a fiscal union where the citizens of one member state with strong growth rates paid taxes that would go to the citizens of a country with weak growth rates. Since such automatic mechanisms are now impossible to put in place for essentially political, even moral, reasons, the Union and its citizens are therefore not equipped to composedly tackle the inevitable recurring crises.