[autom.vertaling] [ Commentaar ] Evenwichtige begrotingen: David v Goliath? (en)

EUOBSERVER / COMMENT - Monsieur Mer's announcement that France would remain in breach of the 3 percent budget deficit ceiling in 2004 followed by Herr Eichel's admission that Germany would do the same drives one more nail into the coffin of the Stability and Growth Pact (SGP).

The debate in Brussels has taken on a curious David-and-Goliath hue. Much of the financial press seems to have cast the rule-breakers - France and Germany - as the villains while the smaller countries wanting to stick to the rules - Austria and the Netherlands - are portrayed as the good guys.

In truth, it's the other way around! The European Commission, which this week forecast EU-15 unemployment in 2004 to rise above the July 2003 level of 8.1 percent, appears to have lost the plot!

Quite rightly, France and Germany refuse the SGP cap on fiscal spending and risk prolonging Europe's recession. In the 1990s, proponents of the `new economy' claimed that recessions were a thing of the past.

Then the bubble burst! The US headline budget deficit is currently approaching 5% and the economy is showing renewed signs of life with no threat of inflation; for that matter, so too is Japan where the deficit is 9 percent!

There is nothing sacrosanct about 3%

All market economies are prone to recurrent business cycles. Advanced economies have built in stabilisers; when national income grows quickly, progressive taxes take a fatter bite from rising income and budget surplus results. When National Income is falling, Government spending on things like unemployment benefit rises while tax receipts fall: a budget deficit results. A budget deficit boosts aggregate demand, thus facilitating renewed economic growth. France's forecast 2004 GDP is barely growing while Germany's will not grow at all. In truth, both countries should be increasing, not decreasing, their budget deficits.

The 1997 SGP, passed to give teeth to the Maastricht Treaty rules and convince financial markets that countries like Italy and Spain would be financially responsible, set the deficit limit to 3 percent of GDP. There is nothing scientific or sacrosanct about this number. Three percent was merely though to be a number financial markets could live with irrespective of whether it referred to the headline or the core budget deficit, or of the depth of recession or even the imminent threat of inflation.

Market fundamentalism

In reality, the real debate over the SGP is between those who believe in active government and Keynesian counter-cyclical fiscal policy, and those who believe in minimal government and market fundamentalism.

The David-and-Goliath metaphor simply does not fit the Dutch and Austrian cases. Both the Dutch and Austrian Finance Ministers are from centre-right parties. Gerrit Zalm was in 2002 the Chairman of the Volkspartij voor Vrijheid en Democratie (VVD) and Karl-Heinz Grasser is an ex-General Secretary of the Freiheitlichen Partei Österreichs (FPO). Mhr Zalm, as Finance Minister in the second Balkenende Government (and in the earlier `purple coalition'), has recently presided over a drastic dismantling of the once-proud Dutch welfare system while his Austrian counterpart's Party has broadly similar aims.

The Washington Consensus and the EU

Conservative economists like balanced budgets as much as they dislike Keynes. Keynesianism became the dominant paradigm in the US and Europe after the Great Depression and remained so until the Reagan-Thatcher years. It was only in the 1980s that monetarism gained ascendancy, both in Anglo-Saxon circles and also in the main international financial agencies: the IMF and (to a lesser degree) the World Bank. It was the American economist John Williamson who in 1990 coined the phrase `the Washington consensus' to summarise the economic prescriptions of market fundamentalism, or what is sometimes called neo-liberalism.

Cuts in social spending, budgetary austerity, privatisation of public services; supply side reform of labour markets: all are well-known menu items of the `Washington consensus'. In the past decade, the IMF imposed a combination of liberalisation and extreme fiscal austerity on a variety of Third World countries including Mexico, Thailand, South Korea, Indonesia, Brazil and most recently Argentina. The main aim of such programmes has been to restore these countries' `credibility' with international financial markets enabling them to repay overseas debt. The results of fiscal austerity have been to foster disastrous recessions and cause unemployment in the name of `sound public finance.'

Arguments over reform of the SGP must be placed in the context of a globalisation debate in which economic ideologies and the policies they beget are fiercely contested. The simplistic David-and-Goliath metaphor applied to EU member states serves more to obscure than to enlighten. If there is a Goliath to be tamed, it is today's huge and highly volatile capital markets and the conservative economic doctrine that serves them. In reality, the underlying issue is whether Europe's unique model of the `social market' economy can be preserved, albeit with some modifications, or whether it is to be replaced by a US model of free-market capitalism, promoted on a world basis by IMF-style orthodoxy.

The author is Professor of Economics at ISS in the Hague