29th Mar 2023

EU's Mr Austerity: No need to change debt ceiling

  • "If you have a car with one empty tire, the problem is not solved if you put more fuel in the car," said Alfred Katterl when asked about Greece. (Photo: Alice Pasqual)
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Austrian official and fiscal hawk Alfred Katterl has said the EU's 'stability and growth pact' on national debt-limits should remain sacrosanct, but some economists disagree.

Katterl spoke at an online conference on Wednesday (29 September) hosted by Fiscal Matters, a group of civil society organisations, together with other representatives from the EU's so-called 'frugal countries' - Austria, Denmark, the Netherlands, and Sweden.

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He backed a recent letter they recently sent to the European Commission calling for a renewed effort to "reduce excessive debt" among member states.

"If a country is in debt, that is a reflection of the fact that the country's economy is not in balance," Katterl said.

"Some parts [of the EU's stability and growth pact] can be changed," he said, joking that the "full pact in all its beauty is 300 pages long."

But the EU's current debt and deficit limits should not be deviated from, he said.

"The pact is not an obstacle for national politics - discipline does not mean austerity," he said, adding: "If you get the benefit of the deal, then you should also help uphold the deal."

Katterl was the keynote speaker at Wednesday's event.

He has been head of the General Economic Policy Department in Austria's ministry of finance since 2002 and was instrumental in creating European Stability Mechanism (ESM), an EU emergency fund set up following the financial crisis in 2008.

Greece, one of its recipients, shrank its public sector by 25 percent between 2009 and 2017.

And according to a study conducted by the ESM itself in 2020, one of the unintended consequences was a spike in unemployment, followed by a brain drain - of some 10 percent of the labour force between 2009 and 2017.

However, these facts were not touched upon in the debate, and when discussing the contents of the letter, Katterl said he "failed to see a connection between national budget issues and the Stability and Growth Pact."

The deal works, but not for everyone

Others were less convinced that member states have benefited equally from the EU's debt-and-deficit rules.

According to US Nobel-prize winning economist Joseph Stiglitz, also a speaker in one of the debates hosted by Fiscal Matters this week, the EU rules were a "calamity."

After receiving political pressure from German and Dutch governments following the financial crisis in 2008, Greece, Italy, Spain, and Portugal were among the countries that cut public expenditure the most.

According to Stiglitz, these 'austerity policies' resulted in another crisis - the euro crisis of 2010 - that resulted in delayed economic recovery in the north and persisting economic stagnation or even contraction in southern countries.

"In 2000, Italy's average standard of living was virtually equal to that of Germany (98.6 percent of its GDP per head). However, by 2019, Italian per capita income was more than 20 percent below that of Germany," the Austrian economist Philipp Heimberger of the Vienna Institute for International Economic Studies also wrote in an article published by Social Europe, a think-tank.

"One explanation for this is that the value of the euro reflects the average strength of all eurozone economies. This means the common currency is too cheap for Germany (which boosts German exports) and too expensive for Italy," Heimberger said.

Money for reforms

But when confronted with these facts by the economist Frank van Lerven, one of the organisers of Fiscal Matters, Katterl said that "it isn't just a matter of money, but what to do with the money."

According to Katterl, Greece, for instance, has received a lot of money, but this did not contribute to sustainable goals.

"If you have a car with one empty tire, the problem is not solved if you put more fuel in the car," he said.

He found an ally in Dutch professor Harold Benink, chairman of the European Shadow Financial Regulatory Committee, also a think-tank.

"The Hanseatic league should have asked for reforms before putting the pot of money on the table. This only gave countries like Italy an automatic claim to the money," Benink said in the Fiscal Matters debates.

"If countries like Italy know we don't give away money for free, the political dynamics change," he explained.

According to Benink, Italy should only receive extra fiscal leeway if they promised reforms - "like labour market reforms".

Every five years, they would have to show that they had kept their promise, at which point the country "will be rewarded" with access to new funds or debt restructuring.

A difference in perspective

However, Italy has already carried out many market-liberal reforms.

In 2015, the OECD assessed Italy's 'reform efforts' as significantly more robust than those of Germany and France.

But, according to Heimberger, this has come at a high cost.

"Fiscal austerity has put pressure on domestic demand and, as a consequence, economic growth," Heimberger wrote in Social Europe, adding that "Italy's austerity policy led to a dismantling of the healthcare system, which has proved fatal during the Covid-19 crisis."

A taste of future dissent?

According to Katterl the frugal four's recent letter "represents a consensus view."

But the Danish and Swedish representatives at the Fiscal Matters discussions seemingly disagreed.

Lisbeth Bech-Nielsen, a member of the Danish parliament for the Socialist People's Party, and Monika Arvidsson, a research officer at the Swedish Trade Union Confederation, both argued for more flexibility in the rule for countries with high unemployment or that want to invest in green technology.

The Dutch expert, Benink, also said: "There are differences between the countries in the Hanseatic League".

The Netherlands is currently in the process of forming a new government, and "perhaps the Netherlands will be less frugal and move towards Germany," in future, he said.

For his part, Italy's prime minister Mario Draghi on Wednesday reiterated that the stability and growth pact is "obsolete" and said there's "no danger" of it returning in the same form.

"Our budget is fundamentally expansive," the prime minister told reporters in Rome. "Growth is the way out of the problem of high public debt."

This view puts him in direct opposition to opinions expressed by one of Austria's most prominent economic policymakers.

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