The Beginning of the End or the End of the Beginning for the Stability Rules

The latest skirmish on the budget, as Berlin (and Brussels) try to hold the line on the stability rules, while Paris and Rome push for greater flexibility, is very much a draw.  Hollande and Renzi wanted and needed a very public fight to show their citizens that they have been pressing for less austerity to ensure economic growth, even as they reaffirmed their respect for the rules.  They won by gaining modest concessions that marginally violate the rules on austerity. Merkel also won by ensuring that they too had to make modest concessions toward greater austerity.  This leaves the question:  is this the beginning of the end for the stability rules or is it just the end of the beginning—with wrangling about the rules the new modus operandi? If the latter, Eurozone economies will continue to sink.

Quote appears in the Greek newspaper newspaper Kathimerini on November 6, 2014.

Comments on French Crisis and Germany’s Role

Here are some comments from Professor Schmidt in response during a recent interview on the role of Germany in the recent restructuring of the French government:

On the role of Germany in the restructuring: It played no direct role, but of course indirectly, Germany does. First, through its ordo-liberal ideas that underpin the Stability and Growth Pact and all the subsequent packs (six pack, two pack) and pacts (fiscal compact), and a discourse that has promoted the ‘Stability Culture,’ and policies focused on austerity and structural reform as the only answer. But why blame only Germany? Its allies include the ECB, that also believes in stability, and has pushed austerity and structural reform as a quid pro quo for its own monetary policies; the Commission, that has only begun to show flexibility very recently; and a variety of member-states worried about a ‘transfer union’ in which the core would have to pay for the periphery. Moreover, France (under Sarkozy) signed up to all of this as well, so Hollande is stuck with it, whether he likes it or not.

That said, Montebourg’s comments about the German obsession with austerity were indeed crucial to his ousting for two reasons. First, he is a Minister in a government in which the President had just announced continued austerity and structural reforms in line with ‘the line’ of the EU. Breaking ranks in this way is never appreciated by any Prime Minister or President of a country. Second, no doubt there were already frictions with the PM, and this was the opportunity to get rid of him. Montebourg may himself have welcomed it, so that he is no longer associated with a President (and government) he plans to run against in the next Presidential elections. But this means that there will be no vocal representatives of the left of the Socialist Party in the government—a problem for Hollande in terms of keeping his party entirely behind him.

Finally, on whether Berlin with change its European policy, the answer is not in the discourse, but possibly in the practice. My sense is that the discourse will continue to focus on ‘staying the course’ of austerity and structural reform, but that the Commission will exercise increasing flexibility in meeting the criteria, and the Council is likely to try to provide some investment to promote growth. I think by now everyone recognizes that these policies are not working, and you can’t just blame the Greeks, the Italians, and the French for it!

If I am asked: will policy change a lot soon? The answer is no. However, policy is likely to shift incrementally over time, in particular if and when the Council itself becomes increasingly represented by social-democratic member-state leaders.

Hollande’s Tax Rebels Underscore Mounting Opposition

Hollande is caught between a rock and a hard place.  The rock is the European Commission, which has been pushing him  to reduce deficits significantly.  Having been given a two year extension on the rules that demand a 3% deficit or lower, Hollande has to find the money.  The easiest way to do that, and the fastest, is to raise taxes.  That French taxes are high is not the main problem, despite the fact that they are the highest in the Euro-area.  Like the Scandinavian countries, French citizens get a lot for their money in terms of a high level of public services, including high quality day care and generous allowances for child-care, which have translated into France having one of the highest birth rates in the EU (alongside Sweden).  The problem is that with the economy slowing and unemployment high (esp. youth unemployment), ordinary citizens don’t want to hear of any tax increases, in particular because they see the rich leaving for across-the-border tax havens, such as Belgium, and government officials maintaining their perks.  The hard place, then, is the citizens.  It is all the harder for Hollande, given his popularity ratings, which are the lowest historically for any President of the Fifth Republic, and because he has failed to find a discourse that legitimates his adherence to Eurozone agreed austerity—remember that he pledged ‘growth’ in his presidential campaign—or a strategy that actually could deliver growth.


Hollande’s Tax Rebels Underscore Mounting Opposition by Gregory Viscusi and Mark Deen (Bloomberg 11/20/13)


Austerity Seen Easing With Change to EU Budget Policy?

Vivien Schmidt’s comment on Mathew Dalton’s September 19 Wall Street Journal article, “Austerity Seen Easing with Change to EU Budget Policy,” was picked up by AP reporter Juergen Baetz. Comment and links to both articles below.

Easing austerity through change to EU budget policy is a very significant move.  If agreed by EU finance officials, changing the calculation of the ‘structural deficit’ could go a long way to easing the economic problems—and thereby the political ones–of the Southern European countries as well as Ireland.  It is also a silent acknowledgement of the fact that the radical deficit cutting programs of the past three years have failed to address growth.  It may not be possible to reverse the financial stability rules and numerical targets of the various Eurozone pacts, but  it is possible to reinterpret them.  And by reinterpreting them, the worst aspects of those rules, the growth destroying aspects, may be set aside.  What we are seeing is the beginning of a process of re-evaluation of the economic policies that have kept growth down while increasing debt-to-GDP ratios, and thereby keeping the Eurozone from exiting the crisis.  It is about time.


Austerity Seen Easing With Change to EU Budget Policy – Change Would Have Big Impact on Spain, Significantly Reduce Estimates of Government’s ‘Structural Deficit’ by Mathew Dalton (Wall Street Journal 9/19/13)

EU to Change Budget Calculation to Ease Austerity by Juergen Baetz (Associated Press 9/19/13)

Comment on the Greek crisis and EU leaders meeting

It is amazing how blind the EU leaders (German Chancellor, ECB, and some in the EU Commission) are to the political dangers involved in trying to force Greece to implement economic cuts that are bound to fail, that have already failed, and that will plunge the country deeper into misery….and anarchy!  What EU leaders need to do now is to extend the Greeks an olive branch.  Certainly hold them to the loan agreement, but give them time to repay and grow.  This means that in exchange for holding the deficit where it is today, rather than insisting on continued radically rapid deficit reduction, that the Greeks promise to continue to reform—by tackling tax evasion, corruption, and structural reform.  And make offer a new set of terms today.  Don’t wait til the upcoming legislative elections!


Court official to be appointed Greek interim PM (Associated Press 5/16/12)

Comment on French elections

The presidential elections in France, the legislative elections in Greece, and the regional elections in Germany together mark a turning point for the EU. The results make clear that, despite their differences, European voters all share a common view that current leaders are not delivering. In France and Greece, voters want an end to unending austerity that doesn’t work.

But whereas France’s second round of the Presidential elections brought into power a Socialist government that can govern, and govern to the center, Greece’s election put into place a legislature even more divided than the first. The presence of extremist parties on the right and the left also cast further doubts on the country’s governability. The German elections, with the rise of the Pirates party and the defeat of the Liberal Democrats, Merkel’s coalition partner, suggest that even voters in this country are fed up with policies that don’t work.

Let us hope that the new French President Hollande will be able to work sufficiently well with the continuing German Chancellor Merkel to produce new policies that will convince the markets that the Eurozone will finally do enough to promote growth, with all the backstops necessary, whatever happens with Greece.


Voter Anger Sweeps France (Wall Street Journal 5/7/12)

Partial EU Pact Reached

There’s a joke told about Gorbachev who, when asked to say one word about the state of the Soviet economy responded: GOOD. When asked for two words: NOT GOOD. The same could be said about the agreement reached Friday. The agreement is good in that the pact on fiscal union gives the ECB what it needs to become a lender of last resort if and when it becomes necessary. Good in that progress was made with regard to increasing the firepower of the loan guarantee mechanisms, the EFSF and ESM. Good in that it did not give Cameron the concessions for the CITY in exchange for his buying in. However, the agreement is not good in that it did not even consider euro-bonds or any other form of pooling member-state debt. It is not good with regard to the substance of the fiscal union, which is all about austerity, with nothing to promote growth. And there is nothing on political union. We remain with technocratic oversight of member-state budgets, and intergovernmental bargains. With no thought to building in democratic legitimacy, say, through European Parliamentary involvement. If the fiscal union fails to promote growth, can EU leaders really expect fellow leaders to toe the line when national publics are out protesting in the street, asking why their leaders are cutting budgets more, rather than trying to relaunch the economy?


Tensions Rise at EU Summit (Wall Street Journal 12/9/11)

France and Germany Push Deal

The fiscal union that German Chancellor Merkel has been pushing is a side show to the real game, but a necessary one.  It gives the ECB an excuse to act as a lender of last resort, to stop the market pressure on Italy and Spain and contagion to France.  It also keeps German voters and Merkel’s own political coalition on her side.

But the real game is not just to stop the markets but also to  jump start growth.  And for this, the fiscal union as currently conceived is a disaster.  It focuses only on austerity, with radical deficit reduction as its cornerstone.  This will not solve the growth problem.  It will not end the eurozone crisis.  It will just substitute a growth crisis for the debt crisis, and push Europe and arguably the rest of the world into economic recession.


France Vows Powerful Summit Deal (Reuters 12/7/11)

US Officials Quietly Cajole European Leaders on Debt Crisis (Washington Post 12/7/11)