Saturday

26th Nov 2022

Opinion

Fiscal discipline rules in eurozone are devastating

  • Social unrest has given rise to political polarisation in Italy and France and other southern European countries - which cannot be curbed due to demands for public savings in accordance with the stability and growth pact (Photo: Olivier Ortelpa)

The conflict between Italy and the EU is a symptom of the devastating rules of the eurozone, and the social turmoil in France may well have the same origin.

In suburbs and in the countryside, social unrest has given rise to political polarisation in Italy and France and other southern countries, which cannot be curbed due to the commission's and the council's continuing claim for public savings in accordance with the stability and growth pact.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

The creation of the euro was followed by rules for fiscal discipline to avoid unsustainable public deficits and debts, but there was disagreement on another central issue, namely the need to coordinate economic policies among member states to ensure that no country benefited at the expense of other countries – e.g. to stop beggar-thy-neighbour-policy in the eurozone.

Some emphasised that if monetary policy ensured low inflation and fiscal policy secured healthy public finances, market forces would ensure that no country benefited at the expense of other countries.

Others who also included historical experiences from former monetary unions could not support this market-formed opinion.

Germany's role

When the eurozone was established, there were differences in the countries' competitiveness.

After reunification Germany suffered from poor competitiveness and unemployment was above 10 percent, but without visible influence on wages and employment outlook, in contrast to this market-formed view.

As consequence German employers insisted that the German practice of centralised wage agreements had to be changed so that wage formation took more account of individual companies.

New labour market legislation (Hartz reforms) was implemented, which led to lower wages for already low-paid workers.

Increasing economic inequality followed, as wage competitiveness improved.

The price was political problems. The Social Democratic Party (SPD)'s chairman had to leave and the SPD lost the subsequent election.

The increased German competitiveness increased both exports and employment - but at the expense of employment in other member states where unemployment rose.

This aggravated public sector deficits which led the commission and council – in accordance with the stability and growth pact - to demand public saving with further increased unemployment.

Financial crisis

During the financial crisis unemployment and the public deficit grew further.

The European Commission and Council demanded the rules of fiscal discipline tightened and managed so brutally, that some member states lost their fiscal freedom.

Now 20 years after the establishment of the eurozone it has been clearly demonstrated that market forces - as the neoliberal assumed - cannot create balanced economic development fast enough to avoid prolonged social stress even with structural reforms, because structural reforms both take a long time to implement and often works slowly.

This is again demonstrated in France.

French social turmoil

Several French governments have worked to reform their labour market, and with the present government's recent changes, the French labour market is perhaps more flexible than in Germany.

But an improvement in employment outlook has still to be seen, which also has feed into the present social turmoil.

The crucial economic transmission mechanism between countries in a monetary union is through the balance of payment, as the exchange rate among member states is fixed.

Accordingly, coordination between member states must be rooted in requirements to secure a reasonable balance between exports and imports etc. as reflected in the balance of payments.

That is, economic policy coordination must ensure that production in a country matches the overall demand in the country.

This crucial point of departure for economic coordination is reflected in EU regulation 1176/2011 on the prevention and correction of macroeconomic imbalances in a member state or in the EU-union as a whole.

Surplus and deficit countries

The Netherlands, Denmark and Germany have since 2012 or 2013 overstepped the upper surplus limit, six percent of GDP, on the balance of payment with beggar-thy-neighbour effects for e.g. southern member states reflected in as well high unemployment as public deficit.

But the commission and the council disregard this regulation.

Due to this, and from a professional point of view, the stability and growth pact as well as the fiscal pact must be replaced, as we propose, with a coordination pact which base economic coordination between member states on balance of payment considerations: both excessive surplus and deficits shall be avoided.

Such a pact will induce Germany and other surplus countries to promote domestic activity and reduce a too big export sector benefiting especially deficit countries with too big an unemployment.

This will not only ensure a better policy coordination but also ensure that member states avoid economic disaster.

This is not only a professional opinion but is also demonstrated in practice.

Countries with a reasonable balance of payment situation has never asked for assistance from the IMF.

All four euro-countries (Greece, Ireland, Spain and Portugal) which asked for assistance after the financial crisis experienced huge balance of payment deficits.

And two of those, Spain and Ireland, had a public surplus up to the financial crisis, also brought about by an overheated economy – but no clear warning came from the central indicator, the public balance, in the stability and growth pact.

If a deficit on the balance of payments is avoided, a country can internally finance a deficit on the public balance with surplus on the private balance.

Since 1981 Japan has had a surplus on the balance of payments. An accumulated government debt now surpassing 250 percent of GDP, which is financed without problems, further indicate the central importance of the balance of payment situation.

However, it may be sensible for EU to supplement with a sustainability pact that removes the rigid public deficit and debt limits, and instead requires member states not to process unsustainable public debt that may have negative consequences for other countries if such a situation should erupt.

Jorgen Rosted is former director of the Danish ministry of finance and head of department of the ministry of business affairs. Christen Sorensen is former chairman of the Council of Economic Advisers and a professor of economics.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Austerity did not help Italy - maybe spending will?

Why all the fuss? You might not like their political views but let the Italian government implement some pro-growth reforms because austerity did not work in jumpstarting their economy.

News in Brief

  1. 'Pro-Kremlin group' in EU Parliament cyberattack
  2. Ukraine will decide on any peace talks, Borrell says
  3. Germany blocks sale of chip factory to Chinese subsidiary
  4. Strikes and protests over cost-of-living grip Greece, Belgium
  5. Liberal MEPs want Musk quizzed in parliament
  6. Bulgarian policeman shot dead at Turkish border
  7. 89 people allowed to disembark in Italy, aid group says
  8. UN chief tells world: Cooperate on climate or perish

Stakeholders' Highlights

  1. Nordic Council of MinistersCOP27: Food systems transformation for climate action
  2. Nordic Council of MinistersThe Nordic Region and the African Union urge the COP27 to talk about gender equality
  3. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  4. Friedrich Naumann Foundation European DialogueGender x Geopolitics: Shaping an Inclusive Foreign Security Policy for Europe
  5. Obama FoundationThe Obama Foundation Opens Applications for its Leaders Program in Europe
  6. EFBWW – EFBH – FETBBA lot more needs to be done to better protect construction workers from asbestos

Latest News

  1. Sweden says 'no' to EU asylum relocation pledges
  2. The 'proof' problem with EU sanctions — and how to fix it
  3. The EU gas cap: will the bottle ever be 'uncorked'?
  4. Enough talk, only rights can eliminate patriarchal violence
  5. Swedish EU presidency: 'Ukraine, Ukraine, Ukraine'
  6. EU Commission to keep Hungary's EU funds in limbo
  7. 'No substance' price ceiling for gas leaves everyone disgruntled
  8. Paying consumers who save most energy could tame gas prices

Stakeholders' Highlights

  1. European Committee of the RegionsRe-Watch EURegions Week 2022
  2. UNESDA - Soft Drinks EuropeCall for EU action – SMEs in the beverage industry call for fairer access to recycled material
  3. Nordic Council of MinistersNordic prime ministers: “We will deepen co-operation on defence”
  4. EFBWW – EFBH – FETBBConstruction workers can check wages and working conditions in 36 countries
  5. Nordic Council of MinistersNordic and Canadian ministers join forces to combat harmful content online
  6. European Centre for Press and Media FreedomEuropean Anti-SLAPP Conference 2022

Join EUobserver

Support quality EU news

Join us