Wednesday, February 1, 2012

Europe's suicide (com)pact

The draft of the fiscal compact, hailed as a masterpiece by Angela Merkel, was released yesterday (see here). Note article 3.1.a. which says that "the budgetary position of the general government shall be balanced or in surplus." This is more stringent than the old Stability and Growth Pact (SGP) that the fiscal compact supersedes. The consequences of fiscal austerity are already dramatic, and the notion that more of the same can actually have a positive effect is simple madness.
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6 comments:

  1. RudiFebruary 1, 2012 at 1:42 PM

    Every countries' budget in surplus? Astonishing idiocy .... that's like saying everybody should be part of the 1%!

    ReplyDelete
  2. Matias VernengoFebruary 1, 2012 at 2:03 PM

    Yep. And it also enshrines the doctrine of expansionary contraction since it says that to "foster budgetary discipline through a fiscal compact" will lead to "sustainable growth, employment" and social bliss. A country may have a structural defict of 1% only if debt to GDP is below 60%. SGP on steroids.

    ReplyDelete
  3. Genaro GrassoFebruary 2, 2012 at 1:21 AM

    However, 6 of 7 EEUU crisis were preceded by budget surplus...
    Shouldn't they have unemployment targets, like EEUU during Okun's times?

    ReplyDelete
  4. Matias VernengoFebruary 2, 2012 at 8:51 AM

    Booms generate surpluses, since revenue goes up. It would be more important to check whether government discretionary spending was being reduced before the recessions, in which case one could claim that, at least in part, contractionary fiscal policy was part of the causes of the recession. There is little doubt I think that in Greece now, for example, fiscal policy is contractionary. The fiscal compact will make things worse.

    ReplyDelete
  5. Genaro GrassoFebruary 2, 2012 at 12:39 PM

    Of course. What I was intending to mention is that this surplus obsession is unfounded both empirically an theoretically

    ReplyDelete

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