32 replies on “Spain Announces Constitutional Amendment on Budget Balance”
This kind of thing would be no help to Ireland, it would only be a platitude.
The question is could we devise a “financial prudence” constitutional provision that would be some help? Does economic theory have a reasonable basis for the rules that would go into this?
Given that Spain is still accumulating debt and is still sitting on un-dropped property prices which could lead to a huge bank recapitalization bill, they’ll need to be careful where they set their constitutional limits.
Spain was one of the countries that opposed the original Euro Pact constitutional budget limit proposal earlier in the year, and by the time the Pact was agreed this provision was greatly watered down. Even a week ago they were saying that constitutional change would be “very difficult”. Now it’s a done deal. What changed?
Did M. Trichet cut and paste the letter he wrote to Berlusconi, and change the country name?
Or maybe Spain figured it is in their own interest? – “We’d love to be able to borrow lots of money at taxpayer expense to recapitalize our banks for the sake of our EU partners and EU financial stability, but we just can’t. Look – here’s the line in our constitution that prevents it.”
What would have happened if issuing a €30bn promissory note to Anglo and INBS was unconstitutional? Or the €50bn contingent liability of the ELA?
Where there’s a will there’s a way. Remember when “we all knew” the EU Treaties as amended prevented bailouts?
While they are at it maybe they should also introduce an amendment to ban the gravity and thus save fuel on flights. It would have the same effect on the realities of life.
Retarded poltical gestures – first limit all credit aggregate growth to some rational measure such as population growth if you want to be truely conservative.
The fiscal thingy is only the clean up phase of operations after the party is over.
What can one say … nothing really – just sit back ,suck your thumb and watch this car crash in slow motion.
@Bryan G
“Did M. Trichet cut and paste the letter he wrote to Berlusconi, and change the country name?”
As I said at the time, there were two letters.
I suspect things are happening ‘in advance’ here. Instructions already given in terms of getting house in order before bailout given or I suppose there’s always the possibility of leaving a booby trap behind to knacker the opposition before they take over the levers of power. Now where have I seen that before? I guess we will just have to wait to see the actual wording of the change.
Take your pick.
1, Closing the door after the horse has well ant truly bolted.
2. Trying to appease Germany.
3. Trying to knobble any advantage the opposition could seize upon in the
November General Election.
4. Trying to contain spreads and convince the markets “we are serious”.
Sometimes things can be so obvious, so simple……….the Euro will split in two. We get to keep the old euro, the fiscal federalists will get a new, much revalued euro. True, they will have to recap their banks, but that will be much more acceptable than cutting us a cheque. Some countries are just in the process of working this out and are getting their applications in early. I suspect the terms of membership may prove to be a bit tougher than a simple budget law, one that was there all along in the Maastricht Treaty. And, of course, neither Spain nor Ireland were egregious fiscal sinners anyway.
Sorry to veer off topic but does anyone know what this is all about?
Simpleton
“And, of course, neither Spain nor Ireland were egregious fiscal sinners anyway.”
Don’t Agree. However, listening to Dr. Edward Walsh yesterday being interviewed by Damien Kiberd we were certainly fiscally incompetent and don’t forget that the banks were proxies for our government not having to borrow themselves to fund their social partnership. They just stood back and let them run amok.
Constitutional limits on government borrowing are utterly irresponsible. They effectively amount to predicting the future, then tying the state’s hands for the rest of time based on the augury.
At best, you’ll end up with manufactured debt crises like we recently saw in the US. At worst, the constitution will be regularly flaunted by the government leading to an inevitable decline in the rule of law.
What would have happened if issuing a €30bn promissory note to Anglo and INBS was unconstitutional? Or the €50bn contingent liability of the ELA?
They would have been given anyway. And if you challenged it the supreme court would have come up with some convoluted, tortured legal argument to allow it; just like they did with internment, Mr. A, and Portmarnock golf club. This is exactly the reason why a constitutional amendment on debt is less than useless!
Simpleton,
nice conspiracy theory. We won’t be in the teutonic elite. We have never been a client state of the Prussians.
What would a monetary union comprising us, Spain, Italy & Portugal have in common. It’s not like we trade with each other.
I presume u believe there was a 2nd shooter on the grassy knoll?
And when a country breaches its constitutional limits in order to pay its own police force, which police force arrests the wrongdoers, which court will pass sentence and which jail will welcome the various cabinet members of the law breaking country?
It strikes me as pointless. Two precedents spring to mind. The first and most obvious is the silly charade that goes on in the US over the nominal deficit – that one has been running for decades. The other is the constraint that used to exist in Italy on the tenor of government borrowing which, as far as I can recall, persisted into the 1980s. This was an apparently sensible legal restraint on government borrowing tendencies, but in practice did not limit borrowing levels, but merely ensured that the ever-growing short-term borrowing incurred had to be rolled over with ever increasing frequency at ever-higher interest rates and/or an ever-declining Lire exchange rate.
This is depressing stuff.
Balanced budjets are gernerally commendable.
Spain has 20% unemployment. It has very small influence on control of monetary policy at ECB level. Spain should be in favor of expansionary monetary policy to gets its people back to work. The ECB is concentrating on keeping down inflation.
So you would expect that Spain needs to use fiscal policy to get people back working by running deficits over the next few years.
If Spain hits a balanced budjet too soon and ECB monetary policy continues to focus on low inflation and a strong Euro where is the employment and growth coming from?
Can a developed country operate effectively with over 20% unemployment (40% youth unemployment) and rising?
As noted in posts above the ECB is a key player in the crisis as it controls monetary policy and prints the money, its the one buying Spanish and Italian bonds and keeping the wolf from the door. The governments are clearly following directions from the people buying their bonds.
The ECB is the most focused on inflation and least focused on growth/employment of all of the worlds major central banks. I think people should anaylse more the aims and decision making processes of the ECB. It is my opinion that it needs to be reformed. Currently it is clearly to the advantage of the financial industry and to the detrement of workers. To the advantage of pensioners and to the detrement of young graduates. The ECB is quite willing to live with very high unemployment in peripheral countries.
On a wider scale demographics come into play here. The average voting age in the younger USA is about 50. Europe is at risk of stiffling its youth with policies favoring an increasingly ageing population. See Italy. See Japan. The Council of Europe no less has encouraged member states to lower voting age to 16 due to the risk of young people being marginalised in national debates. http://mg.co.za/article/2011-06-24-lower-voting-age-to-16-says-council-of-europe
All this constitutional amendment stuff on fiscal discipline, albeit generally sound enough in a reasonably sane world (if and when we ever arrive at one), is simply smoke and mirrors designed to cover Dr Merkel in her political back yard for her ‘error of judgment’ in initially spinning reality rather than addressing the Euro Banking Crisis head on.
I hear she is also sitting on three or four thousand tons of gold! Must be worth a few bob … How many tons does The Governor sit on? Pretty useluess stuff Gold Au – doesn’t react with anything – doesn’t do anything …
What a clever move by Spain, though how will a 60% debt:GDP work when the existing level is 68%.
Reason it’s clever, is that if Spain is faced with a massive bank recap bill then it can turn around to the ECB and say “sorry lads, we’d like to bail out bondholders but that would mean our debt:GDP would rise and that would be unconstitutional. Lo siento”
Remember Caja de Ahorros de Mediterraneo which needed €6bn of recap and liquidity last month, after the EBA said it might need a few hundred million just a week before? When the mierda hits the fan, the Spanish might be able to point to their constitution to avoid our stupidity.
On a related topic. I see Ireland is now the top performing bond market in the EZ in the last 3 months with a 14% total return. Could it be that JTO is right and most of the doom porn merchants wrong?
BKIR is still 9c though.
One of the best books I’ve read on political economy was the ‘dead economists’ book by Todd Buchholz…he takes a breezily honest approach, and admits politicians are naughty, populist actors. It seems constitutional level fiscal rules are needed…but…as Buchholz himself points out, macroeconomic data/signals are often hopelessly in arrears/ too late. It will be interesting to see how politicians deal with that one….
An amendment that would preclude a rise in spending during a recession would be crazy but what is the solution in a fiscally incontinent country?
Like the Tea Partiers who want Medicare and others to be subject to cuts, in Ireland with a tradition of plundering the public purse to public acclaim when times are good, the multi-seat system makes it difficult if not impossible for a candidate to resist local demands for public funding demands, even in less flush times.
With local residential rates abolished since 1977, there is no direct link between spending on services, value for money and taxes.
@Michael Hennigan
1977! Twas an Economist from .. er .. Trinity wot did it. Gotta keep a close eye on these Economists from Trinity …. 😆
@Jagdip
Good point Jagdip – did not think of that , but will they have the balls to use it ?
@Jagdip
Good insight on Spain. Smart move.
A constitutional debt limit in Ireland in September 2008 would not have been breached. Now a constitutional ban on the assumption of liabilities equal to GNP x 3 ………
@Colm McCarthy at 14:30
A constitutional debt limit in Ireland in September 2008 would not have been breached. Now a constitutional ban on the assumption of liabilities equal to GNP x 3
Precisely. The Danes and the Icelanders, outside the Eurozone, have been able to confront financial influence but not any other country under the shadow of the ECB.
As mentioned in another thread a constitutional ban on governments assuming private debts to coddle investors would pass everywhere in the Eurozone. The reason we have not had some such popular initiative is that the structures of European governance has been individually captured by the financial sector, and it is now politically less practical to soak the rich than the rest.
An astonishing outcome of EMU, but I suspect only because I was not paying attention at the time.
@Colm
A constitutional debt ceiling might not have prevented the guarantee in September 2008 but wouldn’t it have prevented the subsequent issuance of promissory notes and the borrowing from the IMF/EU to recap the banks?
Jagdip:
Depends what way it was structured I guess. My point is that if governments operate free insurance schemes, ex post, for all and sundry with no premiums and no claims reserves, they will go bust despite constitutional debt limits. So a constitutional debt limit slams the door of the stable beside the one from which the horse has escaped.
I think the Spanish will only be able to wipe their bottom with this constitutional amendment once the EU/ECB put pressure on them to recapitalize their banks. Once EZ countries surrendered their currencies to the dictate of the EU all else is weak posturing.
Todd Buchholz’s ‘dead economists’ book is refreshingly honest about limits, all the more inspiring as it was written at a time when economics was in the grip of the EMH whackjobs.
He rightly pointed out that politiicians are naughty actors, and need to have their hands tied. But he also pointed out that macroeconomic governmental interventions are mostly mistimed, as the data is way in arrears.
Thus I’m very skeptical as to the utility of this blunt instrument. fact is that it is only when the tide goes out, that we learn if growth was a bubble our boom. a more interesting ammendment would be that government policy should _always_ be countercylical
32 replies on “Spain Announces Constitutional Amendment on Budget Balance”
This kind of thing would be no help to Ireland, it would only be a platitude.
The question is could we devise a “financial prudence” constitutional provision that would be some help? Does economic theory have a reasonable basis for the rules that would go into this?
Given that Spain is still accumulating debt and is still sitting on un-dropped property prices which could lead to a huge bank recapitalization bill, they’ll need to be careful where they set their constitutional limits.
Spain was one of the countries that opposed the original Euro Pact constitutional budget limit proposal earlier in the year, and by the time the Pact was agreed this provision was greatly watered down. Even a week ago they were saying that constitutional change would be “very difficult”. Now it’s a done deal. What changed?
Did M. Trichet cut and paste the letter he wrote to Berlusconi, and change the country name?
Or maybe Spain figured it is in their own interest? – “We’d love to be able to borrow lots of money at taxpayer expense to recapitalize our banks for the sake of our EU partners and EU financial stability, but we just can’t. Look – here’s the line in our constitution that prevents it.”
What would have happened if issuing a €30bn promissory note to Anglo and INBS was unconstitutional? Or the €50bn contingent liability of the ELA?
Where there’s a will there’s a way. Remember when “we all knew” the EU Treaties as amended prevented bailouts?
While they are at it maybe they should also introduce an amendment to ban the gravity and thus save fuel on flights. It would have the same effect on the realities of life.
Retarded poltical gestures – first limit all credit aggregate growth to some rational measure such as population growth if you want to be truely conservative.
The fiscal thingy is only the clean up phase of operations after the party is over.
What can one say … nothing really – just sit back ,suck your thumb and watch this car crash in slow motion.
@Bryan G
“Did M. Trichet cut and paste the letter he wrote to Berlusconi, and change the country name?”
As I said at the time, there were two letters.
I suspect things are happening ‘in advance’ here. Instructions already given in terms of getting house in order before bailout given or I suppose there’s always the possibility of leaving a booby trap behind to knacker the opposition before they take over the levers of power. Now where have I seen that before? I guess we will just have to wait to see the actual wording of the change.
Take your pick.
1, Closing the door after the horse has well ant truly bolted.
2. Trying to appease Germany.
3. Trying to knobble any advantage the opposition could seize upon in the
November General Election.
4. Trying to contain spreads and convince the markets “we are serious”.
Sometimes things can be so obvious, so simple……….the Euro will split in two. We get to keep the old euro, the fiscal federalists will get a new, much revalued euro. True, they will have to recap their banks, but that will be much more acceptable than cutting us a cheque. Some countries are just in the process of working this out and are getting their applications in early. I suspect the terms of membership may prove to be a bit tougher than a simple budget law, one that was there all along in the Maastricht Treaty. And, of course, neither Spain nor Ireland were egregious fiscal sinners anyway.
Sorry to veer off topic but does anyone know what this is all about?
http://www.independent.ie/business/irish/secret-us-liquidity-of-115bn-loaned-to-our-banks-2854781.html
Simpleton
“And, of course, neither Spain nor Ireland were egregious fiscal sinners anyway.”
Don’t Agree. However, listening to Dr. Edward Walsh yesterday being interviewed by Damien Kiberd we were certainly fiscally incompetent and don’t forget that the banks were proxies for our government not having to borrow themselves to fund their social partnership. They just stood back and let them run amok.
Constitutional limits on government borrowing are utterly irresponsible. They effectively amount to predicting the future, then tying the state’s hands for the rest of time based on the augury.
At best, you’ll end up with manufactured debt crises like we recently saw in the US. At worst, the constitution will be regularly flaunted by the government leading to an inevitable decline in the rule of law.
They would have been given anyway. And if you challenged it the supreme court would have come up with some convoluted, tortured legal argument to allow it; just like they did with internment, Mr. A, and Portmarnock golf club. This is exactly the reason why a constitutional amendment on debt is less than useless!
Simpleton,
nice conspiracy theory. We won’t be in the teutonic elite. We have never been a client state of the Prussians.
What would a monetary union comprising us, Spain, Italy & Portugal have in common. It’s not like we trade with each other.
I presume u believe there was a 2nd shooter on the grassy knoll?
And when a country breaches its constitutional limits in order to pay its own police force, which police force arrests the wrongdoers, which court will pass sentence and which jail will welcome the various cabinet members of the law breaking country?
It strikes me as pointless. Two precedents spring to mind. The first and most obvious is the silly charade that goes on in the US over the nominal deficit – that one has been running for decades. The other is the constraint that used to exist in Italy on the tenor of government borrowing which, as far as I can recall, persisted into the 1980s. This was an apparently sensible legal restraint on government borrowing tendencies, but in practice did not limit borrowing levels, but merely ensured that the ever-growing short-term borrowing incurred had to be rolled over with ever increasing frequency at ever-higher interest rates and/or an ever-declining Lire exchange rate.
This is depressing stuff.
Balanced budjets are gernerally commendable.
Spain has 20% unemployment. It has very small influence on control of monetary policy at ECB level. Spain should be in favor of expansionary monetary policy to gets its people back to work. The ECB is concentrating on keeping down inflation.
So you would expect that Spain needs to use fiscal policy to get people back working by running deficits over the next few years.
If Spain hits a balanced budjet too soon and ECB monetary policy continues to focus on low inflation and a strong Euro where is the employment and growth coming from?
Can a developed country operate effectively with over 20% unemployment (40% youth unemployment) and rising?
As noted in posts above the ECB is a key player in the crisis as it controls monetary policy and prints the money, its the one buying Spanish and Italian bonds and keeping the wolf from the door. The governments are clearly following directions from the people buying their bonds.
The ECB is the most focused on inflation and least focused on growth/employment of all of the worlds major central banks. I think people should anaylse more the aims and decision making processes of the ECB. It is my opinion that it needs to be reformed. Currently it is clearly to the advantage of the financial industry and to the detrement of workers. To the advantage of pensioners and to the detrement of young graduates. The ECB is quite willing to live with very high unemployment in peripheral countries.
On a wider scale demographics come into play here. The average voting age in the younger USA is about 50. Europe is at risk of stiffling its youth with policies favoring an increasingly ageing population. See Italy. See Japan. The Council of Europe no less has encouraged member states to lower voting age to 16 due to the risk of young people being marginalised in national debates. http://mg.co.za/article/2011-06-24-lower-voting-age-to-16-says-council-of-europe
All this constitutional amendment stuff on fiscal discipline, albeit generally sound enough in a reasonably sane world (if and when we ever arrive at one), is simply smoke and mirrors designed to cover Dr Merkel in her political back yard for her ‘error of judgment’ in initially spinning reality rather than addressing the Euro Banking Crisis head on.
I hear she is also sitting on three or four thousand tons of gold! Must be worth a few bob … How many tons does The Governor sit on? Pretty useluess stuff Gold Au – doesn’t react with anything – doesn’t do anything …
What a clever move by Spain, though how will a 60% debt:GDP work when the existing level is 68%.
Reason it’s clever, is that if Spain is faced with a massive bank recap bill then it can turn around to the ECB and say “sorry lads, we’d like to bail out bondholders but that would mean our debt:GDP would rise and that would be unconstitutional. Lo siento”
Remember Caja de Ahorros de Mediterraneo which needed €6bn of recap and liquidity last month, after the EBA said it might need a few hundred million just a week before? When the mierda hits the fan, the Spanish might be able to point to their constitution to avoid our stupidity.
On a related topic. I see Ireland is now the top performing bond market in the EZ in the last 3 months with a 14% total return. Could it be that JTO is right and most of the doom porn merchants wrong?
BKIR is still 9c though.
One of the best books I’ve read on political economy was the ‘dead economists’ book by Todd Buchholz…he takes a breezily honest approach, and admits politicians are naughty, populist actors. It seems constitutional level fiscal rules are needed…but…as Buchholz himself points out, macroeconomic data/signals are often hopelessly in arrears/ too late. It will be interesting to see how politicians deal with that one….
An amendment that would preclude a rise in spending during a recession would be crazy but what is the solution in a fiscally incontinent country?
Like the Tea Partiers who want Medicare and others to be subject to cuts, in Ireland with a tradition of plundering the public purse to public acclaim when times are good, the multi-seat system makes it difficult if not impossible for a candidate to resist local demands for public funding demands, even in less flush times.
With local residential rates abolished since 1977, there is no direct link between spending on services, value for money and taxes.
@Michael Hennigan
1977! Twas an Economist from .. er .. Trinity wot did it. Gotta keep a close eye on these Economists from Trinity …. 😆
@Jagdip
Good point Jagdip – did not think of that , but will they have the balls to use it ?
@Jagdip
Good insight on Spain. Smart move.
A constitutional debt limit in Ireland in September 2008 would not have been breached. Now a constitutional ban on the assumption of liabilities equal to GNP x 3 ………
@Colm McCarthy at 14:30
A constitutional debt limit in Ireland in September 2008 would not have been breached. Now a constitutional ban on the assumption of liabilities equal to GNP x 3
Precisely. The Danes and the Icelanders, outside the Eurozone, have been able to confront financial influence but not any other country under the shadow of the ECB.
As mentioned in another thread a constitutional ban on governments assuming private debts to coddle investors would pass everywhere in the Eurozone. The reason we have not had some such popular initiative is that the structures of European governance has been individually captured by the financial sector, and it is now politically less practical to soak the rich than the rest.
An astonishing outcome of EMU, but I suspect only because I was not paying attention at the time.
@Colm
A constitutional debt ceiling might not have prevented the guarantee in September 2008 but wouldn’t it have prevented the subsequent issuance of promissory notes and the borrowing from the IMF/EU to recap the banks?
Jagdip:
Depends what way it was structured I guess. My point is that if governments operate free insurance schemes, ex post, for all and sundry with no premiums and no claims reserves, they will go bust despite constitutional debt limits. So a constitutional debt limit slams the door of the stable beside the one from which the horse has escaped.
I think the Spanish will only be able to wipe their bottom with this constitutional amendment once the EU/ECB put pressure on them to recapitalize their banks. Once EZ countries surrendered their currencies to the dictate of the EU all else is weak posturing.
Todd Buchholz’s ‘dead economists’ book is refreshingly honest about limits, all the more inspiring as it was written at a time when economics was in the grip of the EMH whackjobs.
He rightly pointed out that politiicians are naughty actors, and need to have their hands tied. But he also pointed out that macroeconomic governmental interventions are mostly mistimed, as the data is way in arrears.
Thus I’m very skeptical as to the utility of this blunt instrument. fact is that it is only when the tide goes out, that we learn if growth was a bubble our boom. a more interesting ammendment would be that government policy should _always_ be countercylical