A collective of economists have weighed in against the EU Fiscal Compact Treaty, or golden budget rule, which French Socialist President Francois Hollande is laying before parliament next month in order to translate into the country’s laws.
The collective ‘Economistes Atterrés’ warns that the the Treaty represents a twin ‘offensive’ by ‘neo-liberals’ against Keynesian economic policies and by the European authorities against the ‘autonomy of national fiscal policies’.
The collective, which includes economic experts close the ruling Socialist Party, like Daniel Cohen and Thomas Piketty, argues that the treaty ‘does not address the causes of the financial crisis: the blindness and greed in financial markets, the bursting of financial and property bubble caused by financialization, the swelling of income inequalities caused by the fierce competition between countries, fuelled by globalisation.’
Nor does it address the causes of the euro zone crisis, which in their view is down to the lack of genuine coordination of economic policies to promote employment, the imbalances caused by the northern European members of the zone seeking surpluses at the expense of the weaker southern members and the ban on the ECB from directly funding member states that fuels financial speculation and growing indebtedness in the euro area.
Treaty confirms austerity policies, unending recession
The treaty confirms the austerity policies followed for the past three years, which are ‘driving Europe into a recession without end’ and which are undermining the ‘European social model, plunging millions of Europeans, primarily young people, into unemployment and millions of families into poverty,’ according to the collective of economic minds that was founded last year.
The EU Fiscal Compact, or Budget Pact, is based on a ‘misdiagnosis’: a lack of fiscal discipline. The collective says countries of the euro area are not characterised by having particularly strong deficits: in the three years before the crisis (2004-07), the United States had a deficit of 2.8% of GDP , the UK 2.9%, Japan 3.6%, the euro area of 1.5%. Only Greece had a high public deficit.
The European authorities, with a view to ‘assert control over national policies’, have demonstrated a ‘blind adherence to arbitrary standards’ and as a result have overseen ‘growing imbalances in Europe’ between the North, which has accumulated surpluses to the detriment of the South. And they have been in ‘denial’ about the dangers that financial deregulation has brought.
This is what they say about the EU Fiscal Compact:
According to Article 1 of the EU Fiscal Treaty, the rules would ‘strengthen economic policy coordination.’ But numerical constraints on debt and deficits which do not reflect the real economic situation cannot be considered a coordination of economic policies.
According to Article 3, countries should maintain a quasi-equilibrium of public finances (ie structural public deficit below 0.5% of GDP). This limit has no economic basis. The true ‘golden rule of public finance’, they argue, is that public investment is financed by debt.
The same article requires countries’ rapid convergence towards this goal, to be decided by the European Commission, regardless of the economic situation. Countries therefore lose their freedom of action – to great cost. Thus, in 2013, France is obliged to achieve a deficit of 3% of GDP, a target that will deepen recession in a period of economic depression.
An automatic mechanism would be put in place to reduce the deficit. Again, this means imposing fiscal policies on member states. If a country has a structural deficit of 3 percentage points of GDP, the following year it will have to have a structural deficit of 2 percentage points of GDP, thus cut the deficit by 1 percent, regardless of economic developments. A country hit by an economic downturn will not have the right to pursue policies to stimulate growth.
‘The objective of the Treaty is to realize the neo-liberal dream of freezing budgetary policy by imposing, regardless of the cost, budget balance. This ignores the lessons of 75 years of macroeconomic theory,’ the economists say.
Structural deficit assumes ultra-low investment
The Treaty is based on the concept of structural deficit, that is to say, the public accounts balance adjusted for cyclical factors. This is the fiscal deficit that the country would experience if its production was at its equilibrium level of potential output. This must be evaluated by a number of methods. The extent of the structural deficit depends on the method used. This approach is very problematic, especially in periods of economic depression or macroeconomic shocks. Worse in the case of the EU Fiscal Compact, it is the European Commission’s assessment that is to be used.
And this has two drawbacks: the potential output estimates made for 2006 were lowered significantly in 2008: and they remain close to actual production, since the European Commission’s method considers as structural the fall in investment during a crisis: it underestimates the cyclical deficit and so encourages pro-cyclical policies. Thus, the Commission considers the output gap (the difference between potential and actual output) to be only 2.8% in 2012 to France (ie a structural deficit of 3% ), while other methods of calculation would result in an output gap of 8% (and therefore a structural deficit of 0.5%).
Furthermore, the targets for the structural deficit can be reduced to 1% if the debt is below 60% of GDP. A country that has an average growth rate of 2% per year and inflation rate of 2% and maintains a deficit of 1% of GDP will see debt fall to 25% of GDP. But nothing guarantees that the macroeconomic equilibrium can be achieved with assumptions of a debt of 25% of GDP and a deficit of 1% of GDP. To put this in the Constitution makes as much sense as writing: “Men must weigh 70 kg and females 50.”
Economically fuzzy, inapplicable and unfounded system set in stone
Under the treaty, member States must include the balanced budget rule and the automatic correction mechanism in their Constitution, or if this is impossible, in some other binding and permanent fashion. Thus an economically fuzzy, inapplicable and unfounded system would be set in stone.
Member countries must also establish independent institutions to verify compliance with the balanced budget rule. This is a further step towards a completely technocratic economic policy. Will these independent institutions have the right to challenge the rule, if it does not match the needs of the economy?
According to Article 4, a country whose debt / GDP ratio exceeds 60% of GDP must reduce this ratio by at least one twentieth of the difference with 60% each year. This implies a ratio of 60% is an optimal achievable figure for all countries. However, countries like Italy and Belgium have had decades of public debt at 100% or more of GDP (Japan’s was even at 200%) without imbalances because these debts correspond to high rates of household savings.
New weapon to impose neo-liberal reforms
According to Article 5, a country subject to an “excessive deficit procedure” (EDP) must submit its budget and structural reform program to the Commission and the European Council, which must approve and monitor implementation. This article is a new weapon to impose neo-liberal reforms. Today, almost all EU countries (21 of 27) are subject to EDP (under the existing Stability and Growth Pact). But they do not need neo-liberal reforms, but social and environmentally friendly growth that can only be achieved by breaking with the dominance of financial markets, increasing taxation on the rich and big business, and financing for an ecologically compatible economic transition.
According to Article 7, the Commission’s proposals will be adopted automatically unless they are opposed by a qualified majority excluding the country in question. Thus, in practice, the Commission will have the final say.
This project requires almost automatic fiscal policy, prohibits any policies of economic stimulus. But they were essential for the economic stabilization in late 2008; at the time the IMF, the G20 and the European Commission asked countries to undertake economic stimulus policies. Why are they banned four years later?
Under the Treaty, each country must take restrictive measures in isolation without taking into account their own economic situation and policies, not that of their economic partners. The Treaty makes the implicit assumption that the Keynesian multiplier is zero, that restrictive fiscal policies have no impact on economic activity. Today, in mid-2012, this approach has seen most countries pursue policies of austerity, even though the actual cause of deficits is generally an insufficient level of production and employment, due to the bursting of the financial bubble.
Hollande’s Growth and Employment Pact
The new French government’s desire to renegotiate the Treaty resulted in a pact for growth and employment. Despite its title, it does not have the same weight as the Budget Pact. It has no specific goal in terms of employment and growth. In essence, it only embraces existing projects, and these are generally of a neo-liberal stamp: the Europe 2020 strategy, which requires the sustainability of pension systems (that is to say, to postpone the age of retirement or reduce the level of pensions), an improvement in the quality of public spending (which often means reducing social expenditures deemed unproductive, increasing aid to businesses) to promote the mobility of labour, open competition for services and energy procurement. The Treaty recognizes that there is no agreement on a tax on financial transactions, and while it does open the door to greater cooperation through an agreement between certain countries, it excludes the United Kingdom and Luxembourg, thus severely limiting its scope. Stimulus measures, strictly speaking, are limited, if not non-existent.
The growth and employment pact amounts to about €120 billion or 1% of GDP of the eurozone area (and covers an indefinite period of time) while the national austerity programmes represent €240 billion per year. This €120 billion comprises an expected €60 billion lending capacity of the European Investment Bank with an increase of €10 billion euros of capital, a planned issue €5 billion of bonds to finance infrastructure projects, and finally €55 billion of structural funds that were already available to “measures to boost growth”. In all three areas, there is no guarantee that there will be any actual additional funds committed. Thus, it appears that this ‘growth’ pact was primarily a concession to allow the French Government [after Hollande campaigned against it on the campaign trail] to back ratification of the budget treaty.
Countries lose their autonomy
Furthermore, the treaty does not question the ECB’s failure to guarantee public debt and does not allow the issuance of eurobonds. The European Solidarity Mechanism only helps countries that have ratified and complied with the Treaty. That is, help countries that will lose their autonomy, as their economic policy must be submited to the Troika (the Commission, the ECB and the IMF) and will have to be restrictive, as Greece, Portugal and Ireland have shown, with the upshot that they have sunk into recession and misery. The proposed system will not end financial speculation.
‘In exchange for ECB support to reduce soaring sovereign bond interest rates, countries will have to submit to neo-liberal reforms and austerity plans that will lead the to sink even further into economic depression,’ say the economists.
The collective concludes that the Treaty means ‘an extended period of austerity policies in Europe’ that will cut economic activity, further aggravate the gap between the weaker and stronger Eurozone members and ‘prohibit ambitious policies for environmental investments for the future’.
‘Can Member States, in a bid to convince markets of their future fiscal discipline, afford to be bound by a Treaty that forever restricts they fiscal policies? Can they afford to lose control of setting budgets, after losing control of monetary policy?’
Full Statement (French)
Les Économistes Atterrés is a collective of French researchers, academics and economic experts ‘appalled’ by the fact that after the subprime crisis nothing changed in the discourse supporting economic neo-liberalism and other economic policies that led to financial crisis. Among the founders of the collective were Philippe Askenazy of Centre national de la recherche scientifique (CNRS); Coutrot Thomas, of ATTAC, André Orlean of CNRS and ‘École des hautes études en sciences socialesEHESS and President of the French Association of political Economy, Henri Sterdyniak of the Observatoire français des conjonctures économiques.