It originated in Germany. Then Spain did it and now Italy is on the verge of following suit. Tying the hands of sovereign national parliaments on their fundamental roles of taxing and spending is becoming ever more fashionable.
In August, at the behest of Germany and France, heads of state in the Eurozone agreed that each member state would move to amend their constitutions to enforce a ‘balanced budget’.
The German elite is convinced that the corner shop economics that turned the 1929 Wall Street crash into the 1930s depression, fascism and war is the way out of the disaster facing the 17 nations who abandoned their own currencies 12 years ago to adopt the Euro.
France, instinctively Keynesian, took some persuading. But President Nicolas Sarkozy, who has become obsessed with France’s AAA credit rating, was eventually convinced.
Now all Eurozone states are expected to pass legislation that effectively implements the Maastricht criteria: a cap on the deficit (annual gap between income and expenditure) of 3% of gross national product (GDP) and overall debt of 60% of GDP.
Spain passed the legislation this summer when, despite a bitter election campaign, the then governing Socialists and opposition Popular Party (now in power) found complete unity on the issue.
Italy set to be next to adopt balanced budget law
And on Wednesday the green light was given by Italy’s parliament, currently unquestioningly following the lead of new ‘technocrat’ premier Mario Monti. Not one MP voted against.
In Italy, the law replaces four articles of the constitution and following a speedy passage through the rest of the parliamentary process, will be implemented in 2014.
The law’s spending strictures can only be suspended if there is a “natural disaster” or “serious economic recession”, and in the latter case only if authorised by both lower and upper houses of parliament. Furthermore, the ‘balanced budget’ principle will be extended across the central and local public sector organisations.
Horrified by the unanimity in parliament over the measure, communist leader Paolo Ferrero described it as a “monetarist coup d’etat”.
The communists, excluded from parliament for the first time in the post-second world war, were presumably referring to the anti-inflationary policies of the 1980s pursued by Margaret Thatcher (and Ronald Reagan). These followed rigid spending limits and rolled back the state’s role in the economy through mass privatisation and deregulation while relying heavily on interest rates as the primary lever in managing the economy.
Leaving aside the disastrous impact on public services, welfare and the manufacturing industry of keeping the state tills shut, in Britain’s highly unbalanced economy interest rates were a very blunt instrument. The result was massive unemployment, a speculative bubble (in housing and the stock market) that burst and legacy of huge personal indebtedness.
Sounds familiar? Applying this model to the Eurozone has vastly greater disparities and a central bank, in German mode, far more obsessed with inflation than the Bank of England, is even more disastrous.
Angela Merkel has found an equivalent for Thatcher’s Lincolnshire small shopkeeper. The German Chancellor, whose country already has a balance budget law, says that banks and governments in a financial mess should have heeded the advice of a “Swabian housewife”.
But stories of provincial thrift will do nothing to fix Europe. Extending corner shop economics will only make it worse.