A Permanent EU “Crisis”?

December 8th, 2011 at 4:44 pm | 4 Comments |

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On December 7th, sovaldi French President Nicolas Sarkozy and German Chancellor Angela Merkel presented a pilule 0, medical 5384220.story”>letter to the European Council President Herman Van Rompuy with their proposals for how to solve the current EU crisis. Except their letter was not really a proposal, in that it did not consist of a draft treaty amendment but only broad principles.

But it is clear that the plan they have in mind is creating a state of perpetual “crisis” — and permanent powers to deal with it — inside the eurozone and any other non-euro countries that would be bafflingly inclined to join it.

At first blush, it appears that the eurozone is actually getting serious about putting teeth in the Stability and Growth Pact, which seems a very responsible reaction to potential budget malefactors. The letter does not change the Stability and Growth Pact’s target that annual budget deficits must not exceed 3% of GDP, and suggests that a “new procedure should be established to correct breaches of the 3% ceiling” and that “there should be automatic consequences unless the Eurogroup, acting by qualified majority, decides otherwise.”

However, the 3% deficit measure would automatically bring at least 11 of the 17 eurozone countries into that crisis status, basically every OECD country in the eurozone save Finland, Germany, Luxembourg, and Estonia (the OECD does not track tiny Cyprus and Malta, but I used their 2011 numbers for the rest). This represents over 242 million of the eurozone’s roughly 332 million inhabitants, and three of the six eurozone member states with a AAA bond rating, France (5.7%), Netherlands (4.2%), and Austria (3.4%). Keeping this number at 3% means that these “emergency” or “crisis” measures will never expire, nor will intrusive supervision by Union organs.

The debt limit of 60% of GDP sweep just as broadly, again subjecting at least 11 of the member states, all but Slovenia, the Slovak Republic, Luxembourg, and Estonia (not counting Cyprus and Malta, and all AAA rated member states but Germany), to “a sequence of interventions of increasing intensity into Euro area Member States’ rights … as a focused response to continued infringement” unless a qualified majority decides not to punish them. This accounts for about 322 million of the 332 million inhabitants of the eurozone. Because the deficit and debt groups overlap but do not match, it seems that only Luxembourg and Estonia are off the hook for now.

Such provisions will bring a tremendous amount of logrolling or beggar-thy-neighbor voting on punishment votes. That is not commensurate with the market fetish of these proposals, namely that the markets will see that sanctions will be automatically applied except in very special circumstances. Unless those circumstances are the condition of being France and Germany or other favored parts of a voting bloc including them, the upshot of these sort of faux automatic sanctions is that they will almost certainly be arbitrarily applied. It is curious why France, a Stability and Growth Pact violator as to budget and debt, almost certainly thinks it won’t be punished under the new budget regime.

There is a separate question whether the resources of the entire Union are sufficient to replicate about a dozen national finance ministries to second guess their budgeting process in advance as proposed. Putting aside the staffing of those finance ministries themselves, the talent pool in the rest of the eurozone is likely not deep enough to do what they propose or, said a bit differently, to do it effectively. Confidence is not competence.

The specific interventions and punishments are not described in the letter, but if they are anything like what Van Rompuy hinted, which included suspension of voting rights, they could be very grave.

High deficits and debts have become a serious problem in the eurozone, and the Stability and Growth Pact to date has been ignored in the member states and largely unenforced by the Commission. Even so, this plan does not distinguish between member states that have AAA ratings and Greece, except by the hope that the tender mercies of a qualified majority of those left able to vote might save them from interventions and punishment. It is doubtful the monthly Eurosummit also proposed by the Two will ever disband, given how low they have set the bar to be permanently able to threaten sanctions on almost any eurozone country.

Once again, this shifts the eurozone member state’s responsibility for complying with the Stability and Growth Pact to some subset of states (who themselves are also violators, since almost all are) that have agreed themselves immune from punishment. That is not a formula for engendering market confidence, and it will have an even more sclerotic effect on the democracies in the member states, who forever will have a new excuse to their electorates for the way their national budget, once a product of national legislation, reads the way it does.

Recent Posts by Jeff Cimbalo

4 Comments so far ↓

  • armstp


    How do you deal with these facts in your arguments:

    “Take a look at the average fiscal deficits of 12 significant (or at least revealing) eurozone members from 1999 to 2007, inclusive. Every country, except Greece, fell below the famous 3 per cent of gross domestic product limit. Focusing on this criterion would have missed all today’s crisis-hit members, except Greece. Moreover, the four worst exemplars, after Greece, were Italy and then France, Germany and Austria. Meanwhile, Ireland, Estonia, Spain and Belgium had good performances over these years. After the crisis, the picture changed, with huge (and unexpected) deteriorations in the fiscal positions of Ireland, Portugal and Spain (though not Italy). In all, however, fiscal deficits were useless as indicators of looming crises.

    Now consider public debt. Relying on that criterion would have picked up Greece, Italy, Belgium and Portugal. But Estonia, Ireland and Spain had vastly better public debt positions than Germany. Indeed, on the basis of its deficit and debt performance, pre-crisis Germany even looked vulnerable. Again, after the crisis, the picture transformed swiftly. Ireland’s story is amazing: in just five years it will suffer a 93 percentage point jump in the ratio of its net public debt to GDP.

    Now consider average current account deficits over 1999-2007. On this measure, the most vulnerable countries were Estonia, Portugal, Greece, Spain, Ireland and Italy. So we have a useful indicator, at last. This, then, is a balance of payments crisis. In 2008, private financing of external imbalances suffered “sudden stops”: private credit was cut off. Ever since, official sources have been engaged as financiers. The European System of Central Banks has played a huge role as lender of last resort to the banks, as Hans-Werner Sinn of Munich’s Ifo Institute argues.”

    The crisis, certainly the cause of the crisis, is not all about deficit and debts. It is not all about fiscal and budget irresponsiblities by these countries/governments.

    Fiscal austerity that pushes the southern countries into recession is not really the answer (may make things worse), but a credible macro adjustment plan involving the ECB and buying bonds.


  • SteveThompson

    Here is an article that outlines where Europe went wrong and what painful alternatives are available to solve the issue:


    It certainly is starting to look like 2008 all over again.

  • jcimbalo

    Dear armstp,

    You make some very good points, and I like the ft piece. Your statistics also ring true. They are to a different point than one I was making, so I guess I didn’t deal with them at all. The attempted thrust of this piece is the the eurozone is going from no enforcement to some enforcement under the guise of automatic enforcement of the Growth and Stability Pact. Sarkozy is even using the term “breach,” which implies a knowable condition of noncompliance. With the current numbers, lots of countries are not compliant and stand to be for some time whether by debt or deficit or both.

    You could argue that because people pretty much understood the GSP was mostly hortatory and would not be enforced, which instinct turned out to be almost entirely true, they choose tougher numbers in the hopes people would just miss them. Like when you really want people to drive about 70, set the speed limit at 60-65. But when there are real penalties involved, you/one (and I don’t mean you personally) might want to reference the current reality to find what might be a good cutoff. To my knowledge, it wasn’t even considered, because the euro powers that be saw an opening for some more comprehensive control over most, instead of just the most major violator/s.

    This didn’t really try to capture or interpret the historical data on debts and deficits, though you are right it’s useful to getting why the whole problem happened. It also didn’t get out the crystal ball and try to predict which countries may well get out of the woods of extra enforcement under this plan, but neither either did the movers of the plan discussed above. Thanks for the comment.

    • armstp

      Thanks for the reply. I enjoyed reading your piece because you do not seem to be purely ideological.

      The FT article makes some good points that based on the previous rules you would not have really seen where the problems were up until the financial crisis began in 2007.

      It also makes the point that most of this was not about fiscal budgets getting out of wack. What is interesting is that the southern countries actually have far less government spending per GDP than the northern countries in Europe, so was it really about government spending? And then should it really be about austerity?