EU: Can expansionary budgets save us from hardship?

Should Europe spend its way out of gloom and ever slowing growth? Are there real alternatives to the so called austerity measures, actually efforts to reduce government borrowing and eventually total debt to sustainable levels?


EU government deficits

According to Eurostat, the 2010 total government deficit in the European Union was EUR 805,008 million, or 6.6 per cent of the gross national product (GDP), while 3% is the maximum prescribed by the stability and growth pact (SGP):

In 2010 the largest government deficits in percentage of GDP were recorded in Ireland (-31.3%), Greece (-10.6%), the United Kingdom (-10.3%), Portugal (-9.8%), Spain (-9.3%), Latvia (-8.3%), Poland (-7.8%), Slovakia (-7.7%), France (-7.1%), Lithuania (-7.0%) and Romania (-6.9%). The lowest deficits were recorded in Luxembourg (-1.1%), Finland (-2.5%) and Denmark (-2.6%). Estonia and Sweden (both 0.2%) registered a slight government surplus in 2010. In all, 21 Member States recorded an improvement in their government balance relative to GDP in 2010 compared with 2009, five a worsening and one remained unchanged.

EU government debt levels

The debt level allowed under the SGP is 60 per cent of GDP. At EUR 9,806,372 million, or 80.2 per cent of GDP, the EU was way above the level allowed by the SGP:

At the end of 2010, the lowest ratios of government debt to GDP were recorded in Estonia (6.7%), Bulgaria (16.3%), Luxembourg (19.1%), Romania (31.0%), the Czech Republic (37.6%), Lithuania (38.0%), Slovenia (38.8%) and Sweden (39.7%). Fourteen Member States had government debt ratios higher than 60% of GDP in 2010: Greece (144.9%), Italy (118.4%), Belgium (96.2%), Ireland (94.9%), Portugal (93.3%), Germany (83.2%), France (82.3%), Hungary (81.3%), the United Kingdom (79.9%), Austria (71.8%), Malta (69.0%), the Netherlands (62.9%), Cyprus (61.5%) and Spain (61.0%).

Budget hawks?

Let us pick two countries perceived as budget hawks by many:

With a government deficit of 10.3% the United Kingdom was firmly ensconced between the bailout cases. The UK debt level was 79.9% of GDP in 2010.

Germany, the reference country for eurozone sovereign debt, ran a public deficit of 4.3% of GDP and its debt level had climbed to 83.2%.


Avoiding hardship?

Keynesian stimulus would be welcome to avert hardship and recession, but the coffers are empty and the markets are shedding government bonds, driving up borrowing costs to ruinous levels. We are only one step away from a sovereign debt stampede.

The historic facts (2010) do not take ongoing and future consolidation efforts into account, but my sad conclusion is that the government hovercrafts are unsustainable in the present circumstances.

Austerity is less evil than disaster.



Ralf Grahn

Finland: budget disciplinarian seeing red

In the world of intergovernmental EU economic and eurozone politics, Finland is seen as one of the disciplinarian hawks alongside Germany, Austria and the Netherlands.

However, the return path to sustainable public finances is slow and difficult.

Yesterday evening, the Finnish ”six-pack” government agreed on its budget proposal for next year, after only a day of cross-party talks.

The 2012 budget of Finland promises to be EUR 7.1 billion in the red, which is 13.6 per cent of total central government expenditure amounting to EUR 52.3 billion.

The government points out that the projected 2011 central government deficit is EUR 8.2 billion, so the deficit decreases by more than a billion in absolute terms in 2012. The improved balance is based on expenditure cuts as well as increased revenue through economic growth and higher taxes.

The government plans to shrink the deficit at a measured pace until the end of the electoral period, both in absolute terms and relative to GDP.

Next year the government debt of AAA-rated Finland will grow to EUR 89 billion, but about 44 per cent of GDP is still unusually low in the European Union and the eurozone.

Source:

Ministry of Finance (Finland), press release 14 September 2011: Government budget proposal for 2012, key figures in the spending limits decision and Finland's economic outlook



Ralf Grahn

Eurozone: Budget consolidation in Austria

On 26 April 2010 the Council examined the updated stability programme of Austria, which covers the period 2009 to 2013:



COUNCIL OPINION on the updated stability programme of Austria, 2009-2013; OJEU 27.5.2010 C 137/7.


The Opinion describes the effects of the financial and economic crisis, which pushed the Austrian economy into the deepest recession in post-war history. Public finances deteriorated significantly. The Council decided on 2 December 2009 that an excessive deficit existed in Austria and issued a recommendation to correct the deficit by 2013.

In comparison with the 3 per cent government deficit and 60 per cent government debt to GDP, the reference values of the Stability and Growth Pact, the Opinion offers the following picture:

The Austrian stability programme estimates the general government deficit in 2009 at 3.5 % of GDP. Government gross debt is estimated at 66.5 % of GDP in 2009, up from 62.5 % in the year before.

The Council makes the evaluation that overall, in 2010 the budgetary strategy set out in the programme is consistent with the Council recommendation under Article 126(7) TFEU. However, from 2011 on, taking into account the risks, the budgetary strategy may not be consistent with the Council recommendation under Article 126(7) TFEU.

The consolidation path outlined in the programme, starting in 2011 is not underpinned by appropriate measures. In addition, the budgetary strategy is not sufficient to bring debt-to-GDP ratio back on a downward path.

In view of the new assessment and in the light of the recommendation under Article 126 TFEU of 2 December 2009, the Council of the European Union invited Austria to:

(i) substantiate the measures deemed necessary to underpin the planned consolidation from 2011 onwards, in order to achieve the recommended average annual fiscal effort of 0,75 % of GDP and bring the general government deficit below the 3 % of GDP reference value by 2013; and seize, as prescribed in the EDP recommendation, any opportunities beyond the fiscal effort, including from better economic conditions, to accelerate the reduction of the gross debt ratio back towards the 60 % of GDP reference value;

(ii) further improve the budgetary framework to reinforce fiscal discipline at all levels of government through enhanced transparency and accountability notably by aligning legislative, administrative and financing responsibilities between the different levels of government and by strengthening enforcement mechanisms under the internal stability pact.

Austria is also invited to submit in time for the assessment of the effective action under the excessive deficit procedure an addendum to the programme to report on progress made in the implementation of the Council recommendation under Article 126(7) of 2 December 2009 and to outline in some detail the consolidation strategy that will be necessary to progress towards the correction of the excessive deficit.

The Opinion is useful as an example of the periodic assessment of a eurozone government’s economic and budgetary policies, as well as peer pressure towards action.




Ralf Grahn

EU: Excessive government deficits Ib

Carrot and stick: Economic policy coordination is the persuasive part of economic union, and the procedures concerning excessive government deficits represent the dissuasive arm.
We look at the existing EC (EU) treaty rules concerning excessive government deficits.

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It takes some time to wade through all fourteen paragraphs of Article 104 of the Treaty Establishing the European Community (TEC). Cf. OJ 29.12.2006 C 321 E/84─86:

Part Three – Community policies

Title VII – Economic and monetary policy

Chapter 1 – Economic policy

Article 104 TEC

1. Member States shall avoid excessive government deficits.

2. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria:

(a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless:

— either the ratio has declined substantially and continuously and reached a level that comes close to the reference value,

— or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;

(b) whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.

The reference values are specified in the Protocol on the excessive deficit procedure annexed to this Treaty.

3. If a Member State does not fulfil the requirements under one or both of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State.

The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State.

4. The Committee provided for in Article 114 shall formulate an opinion on the report of the Commission.

5. If the Commission considers that an excessive deficit in a Member State exists or may occur, the Commission shall address an opinion to the Council.

6. The Council shall, acting by a qualified majority on a recommendation from the Commission, and having considered any observations which the Member State concerned may wish to make, decide after an overall assessment whether an excessive deficit exists.

7. Where the existence of an excessive deficit is decided according to paragraph 6, the Council shall make recommendations to the Member State concerned with a view to bringing that situation to an end within a given period. Subject to the provisions of paragraph 8, these recommendations shall not be made public.

8. Where it establishes that there has been no effective action in response to its recommendations within the period laid down, the Council may make its recommendations public.

9. If a Member State persists in failing to put into practice the recommendations of the Council, the Council may decide to give notice to the Member State to take, within a specified time limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation.

In such a case, the Council may request the Member State concerned to submit reports in accordance with a specific timetable in order to examine the adjustment efforts of that Member State.

10. The rights to bring actions provided for in Articles 226 and 227 may not be exercised within the framework of paragraphs 1 to 9 of this Article.

11. As long as a Member State fails to comply with a decision taken in accordance with paragraph 9, the Council may decide to apply or, as the case may be, intensify one or more of the following measures:

— to require the Member State concerned to publish additional information, to be specified by the Council, before issuing bonds and securities,

— to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned,

— to require the Member State concerned to make a non-interest-bearing deposit of an appropriate size with the Community until the excessive deficit has, in the view of the Council, been corrected,

— to impose fines of an appropriate size.

The President of the Council shall inform the European Parliament of the decisions taken.

12. The Council shall abrogate some or all of its decisions referred to in paragraphs 6 to 9 and 11 to the extent that the excessive deficit in the Member State concerned has, in the view of the Council, been corrected. If the Council has previously made public recommendations, it shall, as soon as the decision under paragraph 8 has been abrogated, make a public statement that an excessive deficit in the Member State concerned no longer exists.

13. When taking the decisions referred to in paragraphs 7 to 9, 11 and 12, the Council shall act on a recommendation from the Commission by a majority of two thirds of the votes of its members weighted in accordance with Article 205(2), excluding the votes of the representative of the Member State concerned.

14. Further provisions relating to the implementation of the procedure described in this Article are set out in the Protocol on the excessive deficit procedure annexed to this Treaty.

The Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the ECB, adopt the appropriate provisions which shall then replace the said Protocol.

Subject to the other provisions of this paragraph, the Council shall, before 1 January 1994, acting by a qualified majority on a proposal from the Commission and after consulting the European Parliament, lay down detailed rules and definitions for the application of the provisions of the said Protocol.

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The next post is going to look at other current treaty level provisions concerning excessive government deficits.


Ralf Grahn