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The Golden Rule : “He who has the gold makes the rules ”

The Golden Rule : “He who has the gold makes the rules ”. Discourse on the Political Economy of the Eurozone 29March 2012. Agenda. Part I. Politics - New economic governance in the EU The “ Sixpack ” The “ Fiscal Compact ” (“Begrotingspact”/” Pacte Budgétaire ”)

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The Golden Rule : “He who has the gold makes the rules ”

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  1. The Golden Rule:“He who has the gold makes the rules” Discourse on the PoliticalEconomy of the Eurozone 29March 2012

  2. Agenda Part I. Politics - New economicgovernance in the EU • The “Sixpack” • The “Fiscal Compact” (“Begrotingspact”/”PacteBudgétaire”) Part II. Economics– Separatingtruthfrom fiction • The myth of excessive public spending • The myth of competitiveness Part III. Whatto do? • The democratic deficit • Proposals

  3. PART I : POLITICS

  4. The Sixpack • Five regulationsandonedirective introduce a new frameworkforeconomicgovernance, greatlyextending the powers of the Commissionand the Council • Approved in 2011 by the Member Statesand the European Parliament • Enteredinto force on 13th of December 2011 • Includes the “European Semester” (recent policy initiativesfrequently overlap) • Reinforces the StabilityandGrowth Pact of 1997 (rules on public debtand deficit) • The Commissiondeterminesand monitors macro-economic variables andmakes binding recommendationsto Member States • Visbilityand peer pressure is createdthrough the “scoreboard” • In case of non-compliance the Commissionmay trigger: • Excessive Deficit Procedure (EDP) • As of March 2012 onlyfour Member States are NOT in EDP • ExcessiveImbalances Procedure (EIP) • Penalties in case of non-compliance • Between 0,2 and 0,5% of GDP forviolations of the EDP • 0,1% of GDP forviolations of the EIP • Only the Council may block the fine(s) throughReversedQMV (almost 75% of the votesneeded)

  5. Example Scoreboard

  6. The Scoreboard • Reflect the real priorities of the EU • No social (exceptunemployment) or ecological variables • Nominal ULC • No lower limit • No academicreferencesprovingthisvariabletobeproblematic • Unemployment • Constant unemployment levels of 9% are not a problem?

  7. The Fiscal Compact • Is an Intergovernmental Treaty • Ratification is ongoing, will enter into force 1 January 2013 if by then at least 12 Member States have ratified it • … hence a referendum in Ireland can not halt adoption (although the political implications of a “no” would be substantial) • The United Kingdom and Czech Republic haven’t signed it (yet) • Perhaps a novelty: the Treaty is opposed by the European Trade Union Federation (ETUC) • The Treaty reinforces the Sixpack: • Stresses the “Golden Rule”: structural deficit must be lower than 0,5% of GDP • Only those who agreed to the Fiscal Compact will be able to draw funds from the European Stability Mechanism (ESM), the permanent “rescue fund” • Compulsory anchoring of provisions in the Constitution of Member States • Penalties (European Court of Justice decision): • 0,1% of GDP if the Treaty is not embedded in the Constitution or equivalent

  8. Part II. Economics

  9. The Golden Rule • The Golden Rule: the structural deficit must belowerthan 0,5% of GDP, but this policy goal raises a number of questions • The Golden Rulerelies on “Potential GDP”, anelusivefigure • “As a measure of fiscal rectitude, [the Golden Rule] mandates use of a statistic that is unobservable and can be estimated only with a plethora of assumptions about cyclically adjusted revenues, expenditures and output.” – Prof. David R. Cameron (Yale University) • Example: in 2007 the IMF estimated that Ireland had a structural deficit 0,1% of GDP, a number which was revised in October of last year to 8,4% of GDP • Public debtwillbeforced below 60% • The structural deficit limit is raisedto 1% of GDP whendebt is below 60% • According to Prof. Karl Whelan (University College Dublin) itfollowsthat in the long run, given a nominal GDP growth of 4%, public debtwilltendtowards 25% of GDP (one unit of debtforfour units of growth)

  10. Public Debt: Ireland

  11. Public Debt: Greece

  12. Public Debt: Italy

  13. Public Debt: Portugal

  14. Public Debt: Spain

  15. ComparingGovernmentDebt

  16. Private Sector Debt

  17. Household debt

  18. Conclusions on the Deficit • The claim that“soaringgovernmentdebt” caused the crisis: • Has novalidityforany of the peripheralcountries • … although the persistently high level of debt made it more difficultfor Greece toreact • Overlooks the important factthatrising private debt was far more problematic • The macro-economic scoreboard does not take into account different levels of economicdevelopment of the member statesandimposes a one-size-fits-allframework • During the run-up to the crisis the ECB kept interest rates low, which was helpfulfor the strugglingGermaneconomy, but causedoverheating in the peripheralcountries • Soaringyields on governmentbonds in peripheralcountries have a lot to do with the factthatEurozone members borrow in a currencythey do not control (“originalsin” syndrome), notwith the factthat the overall public debt level is high • The United Statescurrentlyborrows at 2%, despitedebtand deficits levels that are higherthan in a lot of Eurozone countriesthat are currently in trouble • Reliance on fiscal policy alone in times of financial turmoilsignificanlyincreases risk of default andinvestors (speculators) knowit • Recent decreases in bond yields are a consequence of the LTRO rounds more thananythingelse • Austerity has proven deadlyto Greece while the economies of otherperipheralcountries have also taken a diveand are currentely stalling • The “golden rule” depends on anestimate of Potential GDP which is anelusivefigure • Ifappliedconsistently the “golden rule” implies the debt-to-gdp ratio willfall way below 60%

  19. Current Account Imbalances

  20. Wages in Germany

  21. Germany – Sources of NCO

  22. Competitivenessproblem?

  23. Current Account Imbalances • Scoreboard thresholds: -4% < CA/GDP < +6% • The Netherlands and Germany werebothabove 6% • CA imbalances are a zero-sum game ! • … but accordingto the Commission surplus issues are tobe dealt with in the mid-term while deficits requireimmediate attention, henceall the burden is on the deficit countries • The debate is not new; forexample at Bretton Woods in 1944 J.M. Keynes arguedthatboth deficit and surplus countriesoughtto change policies in case of imbalances • According to the International Labour Organization (ILO), wagerepression in Germany is one of the maincauses of the current crisis • … but competitiveness as such is not the mainchannelthroughwhichtradeimbalancescameabout, because • … ifsalaryincreasesin the peripheralcountriesweresucha problem, howcometheirexport volume grewfasterthan in manycorecountries? • Liberalization of capitalmarketsand high savings in Germany as a consequence of disinvestment andwagerepression lead to the Current Account imbalancesandoverfinancing of peripheralcountries

  24. PART III. Whatto do?

  25. The Democratic Deficit • The new treaties, regulationsanddirectivesleave the European Parliament (EP) completely out of the picture • The EP cannotdeterminewhat macro-economic variables are monitored, what the thresholds are, what the recommendationsto the Member Stateswillbe or whether a Member State willreceive a fine • Everything is in the hands of the Commissionwithlimited power to the Council to block a fine (Reversed QMV, almost 75% of the votes) • The EP still has no right of initiative: • Thisrenderselectionsmeaninglessbecause the EP can’toverturnany of the new regulations or directives • The European Parliamentcannot pass anydirective the Commissiondoesn’tagreewith • Motion of censureby the EP against the Commissionrequires a twothirdmajority • The European Council is the most powerful of EU institutions, but this is the seat of European “realpolitik” (large member states are in control) • When push comestoshove the European Council moves around the treaties at will (cfr. the “no bail-out clause” or the Fiscal Compact)

  26. Proposals • On Current Account Imbalances: • Monitor debt-drivengrowth • Have surplus countriescarry the burden • Re-introduce capitalcontrolsto alter the composition of capitalflows • Minimum stayrequirements • PreferForeign Direct Investment (FDI) over debt • Toreducedependency on volatile financial markets, keep 75% of public debtnational, even ifthatimplieshigher interest rates • On financial stability: • Keep banks small, have public and support cooperativebanks • Separate savingsfrom investment banks • Let the EU take responsibilityforsystemic risk • Have an EU system fororderlybankruptcy of financial institutions • Have a macro-economic scoreboard that monitors socialandecological variables: inequality, poverty, carbon emissions, etc.

  27. The ConfidenceFairy

  28. Off-topic: the 1%

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