EU Economic Governance Package Post author By Philip Lane Post date October 6, 2011 This week saw the final agreement on the new EU Economic Governance package. The overview is here. The details are here. Categories In Uncategorized 40 Comments on EU Economic Governance Package ← THE University Rankings → Global GDP and Irish Mortgage Delinquencies 40 replies on “EU Economic Governance Package” Hmmm. Fines for bust countries. That’ll work. The prisons will be full of nations in contempt of court orders for payment… It would appear that the ‘advocates’ have ditched their softly-softly-one-step-at-a-time approach to a USE (United States of Europe) and are now accelerating the process. Some people always know how to maximise steps to achieving their own agenda when there’s a crisis – no better time to do these things of course than during a period when everyone else is running around like the proverbial headless chicken. This point gave me a good laugh though: “The package also establishes a mechanism to penalise statistical misrepresentation of debt and deficit data” Talk about closing the stable door after the Greek horse has bolted! More EU nonsense. They already tried with penalties for countries breaching the Maastricht Treaty and see where that got them. It didn’t work in good times when France and Germany were the first to breach the budget deficit targets to pursue their own interests. And let us not forget that a serious attempts were never made to honor the 60% debt to GDP target in place for over a decade. And in times of extreme market shock the targets didn’t work at all. It makes absolutely no sense to apply penalties to someone who is already broke or going broke. Only goes to show how disconnected the EU legislators are from the real world in their protected ivory towers in Brussels. @Dom K I’m just sorry they did not raise even more debt – then we would not be in this devastating leverage crisis. At least the Treasuries of Germany & France understood modern finance somewhat and tried to counter the ECBs crazy polcies – ours not so much. @ Dom and hoganmahew, Hard as it might seem to believe, the eurocrats thought of these problems. Hogan: The idea of the fines is more like a system of ‘escrow’ in which the money can be released when certain conditions have been met. As such the penalty is not about making broke countries contribute more to the EU budget (which would be stupid), the real penalty is the loss of fiscal discretion as an ever-increasing amount is withheld from violating member states. Dom: Yes they did already try, but the problem was that the Council had a veto which meant countries had to effectively vote to penalise themselves. the new system reverses the onus – countries will now have to vote in order to stop the penalties. This is a very different thing. @ All The view from the European Parliament! http://www.europarl.europa.eu/en/pressroom/content/20110920BKG27073/html/FAQ-on-the-economic-governance-six-pack It is obviously too early to come to any firm conclusions. However, giving the democratic institutional structure of the EU the upper hand in the decision-making should ensure that there will be no repetition of the 2005 experience. Things should never get to the point where penalties would be imposed. It may also be noted that the legal instrument used is that of a Regulation in most instances, not a Directive i.e. no transposition measures by member States are required. One could describe the measures as “federal” as adopted even if this is as yet unproven in their implementation. I just read the opinion of a Swedish professor on the current financial situation. He claimed that there are no good options to resolve it or rather that the choices now are between pest or cholera. I have to admit that I find his kind of honesty refreshing, especially compared to the euro-crats central-planning utopian suggestion that everything will be fine as long as Brussels get more power. Having money in escrow or a permanent bail-out/insurance fund seems more to the benefit of looters: easier to loot money that has already been collected than to try to convince the concerned citizens to collect money after the looting has begun… Dork, Don’t worry. The EU bail-out fund is about to be bailed out with more debt. Inflation has repeatedly proven to be the most politically palatable means of socializing of other peoples’ stupidity. The only thing is that the Germans have a different outlook and a not very fond memory of inflation built into the collective psyche so let’s see if this will go ahead. Ludwig, I do not question the efficiency of the mechanisms designed to financially punish the profligate countries but the idea that penalties can be applied on someone who is broke. It was clear from the beginning that application of such penalties will not be feasible with or without the veto and this is why the targets have been widely ignored. These penalties were a gimmick built into the Euro project designed to give impression that issues have been fully addressed while in reality this was only done to be able to push the Euro project through. Another layer of bureaucracy and integration that should not be needed and which the majority of EU citizens if given a vote would probably reject. No doubt more highly paid eurocrat jobs as well. Dork, Your point on ECB, their mandate is to ensure stability of prices not to bail out countries. Borrowing is the responsibility of individual governments and while the mechanism designed from preventing the governments to get in a situation where they can’t borrow was botched, there was no backup plan. It is daft to expect the ECB to act outside of their mandate to fix what the politicians screwed up. By purchasing junk bonds of Greece and less junky bonds of Ireland and Portugal they have already stepped outside of the framework of their authority. If ECB needs a different mandate they should be given but. The trouble is the Euro crisis is being dealt with on ad-hoc basis and the solution should be to redesign the failed policies rather than more ad-hoc approach. @Dom K If the Germans were really serious about inflation they would have agreed to a default on the malinvested shadow bank credit deposits. They are just interested in getting their money back via the mechanism of deflating the periphery. But if they get their malinvested money back the collective Euro deposits will not shrink – this will also lead to inflation – In Germany. Both we and Germany would have been better off if the Germans & British had higher fiscal debts over the last decade – they would not have exported so much useless credit to us and less real wealth would be lost. Inflation is not just about the amount of money – its how productive the money is – if the money is misspent somebody somewhere always pays. Politics & international relations is about who pays I guess. Dork, Alternatively you could go to assert that ‘both we and Germany would have been better off if the Irish and the Greeks had lower fiscal debts over the last decade’. Ok the Irish fiscal debt was not a problem but the structural imbalances built up during the past decade which have translated into expansion of fiscal debt were a problem. @DOM K Goverment borrowing did not cause this crisis. How is fiscal debt financed ? if the goverment cannot get the CB to print it must in normal times subtract credit deposits. This is a leverage crisis – not a strict debt crisis. What caused this crisis ? – a hyperinfaltion of credit and subsequent malinvestment as the low fiscal defecits could not subtract enough deposits to prevent them building castles in the sky. In a currency union with such insane rules such as this – Gold needs to be at M1 to prevent malinvestment. Its the ratio of goverment money vs private credit which is important – not its size – the overall size of the collective debt merely indicates the size of the economy if the value of the money remains static – this without Gold on the balance sheet is the only form of leverage. Dork, leverage is credit, credit is debt. Perceived inability to repay the debt lead to withdrawal of credit and this perceived inability is a direct result of past debt, credit, leverage whatever you chose to call it which exceeded the range the creditors thought were sustainable. There is no way around this. @DOM K Imagine a system of static goverment money in a closed system – where does it go ? Debt is a illusion – it only gets complicated when you introduce credit & foregin relations. Hi again, Dom, These penalties were a gimmick built into the Euro project designed to give impression that issues have been fully addressed while in reality this was only done to be able to push the Euro project through. This is more than a little unfair, and also quite inaccurate. It seems reasonable to state that if the Debt to GDP rule had been stuck to by all euro-zone members, we wouldn’t have a sovereign debt crisis right now. So the Maastricht criteria were clearly not gimmickry, even if the enformcement mechanisms were a little on the aspirational side. The fact that more automatic mechanisms were not put in place to give enforcement powers to the Commission has everything to do with the democratic deficit and the loss of fiscal sovereignty which such measures imply. Asking national governments to relinquish fiscal sovereignty is one thing; asking them to give that soveriegnty to an undemocratic, unaccountable institution like the European commission is quite another. You cannot have your cake and eat it too. The Irish voted no to the Lisbon Treaty, but it is only with the passage of Lisbon that the extent of the European Parliament’s powers comes to resemble those of a genuine legislative body. As for broke countries paying fines, look at the text of the six pack measures again. The idea is to punish the indisciplined by taking away their fiscal discretion, not by making them pay into the EU’s budgetary pot. @Dom K It is daft to expect the ECB to act outside of their mandate to fix what the politicians screwed up. The ECB have behaved, pace Krugman, impecabbly badly in the rigid application of their mandate. A central part of the Eurozone component of the Global Financial Crisis is that monetarism was effectively written into the “constitution”, a bad place for a dubious philosophy with a disastrous history. The ECB has a politics, and one far on the economic right. The Eurozone crisis is the intersection of the unwillingness to confront the failure of modern financial capitalism to produce a stable economy (a political failure, partially caused by the power of the right in European domestic politics) and the institutional failure of trying to make the export of Bundesbank monetarism a core part of what it means to be a member of the EU (a failure of democratic process). Alas both the political right and the ECB are brought together by a common interest, protecting Euro dominated wealth, and that capitalist solidarity means that finding a solution to either of the EU’s core problems will have to wait until either the ECB’s remaining credibility (interest rate rises anyone?) is spent and they come under political control or the Christian Democrat funk that affects Europe is rolled back. @Jesper Another honest opinion from Michael Lewis “With global markets in turmoil in recent days on fears Greece may default on its debts even amid a second expected bailout, Lewis expects ”it will be very messy” and ”Greece will leave the euro” with ”creditors taking huge losses.” Following on, ”I can’t believe the Irish are not going to join that party” and default on its debts, letting its banks fail. ”These sort of things could happen and it might even be healthy for them to happen rather than have this huge overhang,” he said. On the difference between Ireland and Greece, Lewis said: ”The Irish just have a greater talent for suffering. If you imposed on the Greeks what the Irish have imposed on the Irish population, people would be getting shot.” @Ludwig It seems you are neither a reasonable or rational person – the Irish could easily have funded our debt if we gave the mortgage paper to the bond holders. Our deposits are declining to pay increasing external sov debt , if our deposits became goverment money 3 years ago there would not be a problem with sov debt. However the bond holders would be operating in a cash market where assets would reach their true non rentier value. This is where foregin relations & credit comes in – if the currency union properly valued monetory gold we would not be in this mess. Dear Ludwig, This is from the policy summary: “Stronger corrective action through a reinforced SGP: The launch of an Excessive Deficit Procedure (EDP) can now result from government debt developments as well as from government deficit. Member States with debt in excess of 60% of GDP should reduce their debt in line with a numerical benchmark. Progressive financial sanctions kick in at an earlier stage of the EDP. A non-interest-bearing deposit of 0.2% of GDP may be requested from a euro-area country which is placed in EDP on the basis of its deficit or its debt. Failure of a euro-area country to comply with recommendations for corrective action will result in a fine.” They will ask for a deposit and if the country does not comply it will be fined. Seems that I am correct. It gets better. “Preventing and correcting macroeconomic and competitiveness imbalances: Over the past decade, Member States have made economic choices which have lead to competitiveness divergences and macroeconomic imbalances within the EU. A new surveillance mechanism will aim to prevent and correct such divergences. It will rely on an alert system that uses a scoreboard of indicators and in-depth country studies, strict rules in the form of a new Excessive Imbalance Procedure (EIP) and better enforcement in the form of financial sanctions for Member States which do not follow up on recommendations.” Bye-bye corporate tax and other tax competition. This policy begs the question: what are they going to do with countries already twice the limit? Will they ask Ireland, Italy and Greece to deposit 0.2% of GDP and then fine them if they don’t. I am afraid that 10 years down the line we will be looking for same excuses as to why this didn’t work either. @Ludwig “It seems reasonable to state that if the Debt to GDP rule had been stuck to by all euro-zone members, we wouldn’t have a sovereign debt crisis right now.” Well, no, it doesn’t seem reasonable to say that except maybe in the case of Greece and possibly Italy, though how Italy’s debts can come as a shock is anyone’s guess. Ireland and Spain stuck by the debt to GDP rule until their housing bubbles collapsed. Those bubbles were largely funded within the EU. The fallout from those bubbles is stress on the sovereigns. The bubbles were enabled by inadequate cross-border banking supervision and cross-border supervision of capital flows. These are a function of the centre – the periphery has no power to regulate these. Europe has a hammer, it sees the same nail everywhere. The situation is impossible – we need to leave , foregin & interested domestic commentators pretend to not understand very basic debt dynamics to peserve their own hybrid bank / sovergin fiefdoms. This is all about banks trying to peserve their own core domestic power bases – not Europe or indeed even their host countries. Artificial sovergin debt limits are a absurdity – a country can have any % it wants if does not to service external interest. Be it 150%, 200% or beyond. sorry “any % it wants , if it does not service external interest.” Yes Dork, Japan is the case in point. As long as most borrowing is internal larger figures are sustainable. The fundamental question remains: why run such huge deficits in the firs place when the case of Japan aptly proves that recessions are fixed by state borrowing. Look where NIKKEI was 20 years ago and where it is today regardless of massive government injections and low interest rates. @Dom K If they did not – people would lose their savings & faith in money – with very bad social consequences. Although like here insider risk takers also got bailed out. With the dollar devaluation in 85 I think and subsequent Yen appreciation the Japanese engaged in a massive asset bubble , shunning real wealth creation – ring any bells ? The subsequent low interest rates in their post office and captive banks spread the pain in that society. However a long term saver of Yen has done pretty well for himself despite low interest rates because of a slow sustainable appreciation in the Yen. Unfortunetly representatives of the world bank (Mr Freegold himself , Zoelick) and others have campaigned recently for deregulation of their post office so that this saving can be gamed by sophisticated players. So expect another credit bubble / asset misallocation shortly in Japan and another 20 years of socialisation. Same as it ever was , same as it ever was. Firstly the EU is so far behind on the curve that the tortoise is about to lap it. The insistence on budget rigidity in the face of banking madness reminds me of the Christian Fundamentalists in the US The marks of this new fundamentalism, according to Carter, are rigidity, self-righteousness, and an eagerness to use compulsion (including political compulsion). Its spokesmen are contemptuous of all who do not agree with them one hundred percent. especially in the area of teenage sexual activity and denial of what is really going on Canadian and European young people are about equally active sexually, but, deprived of proper sex education, American girls are five times as likely to have a baby as French girls, seven times as likely to have an abortion, and seventy times as likely to have gonorrhea as girls in the Netherlands. I forgot the link http://www.nybooks.com/articles/archives/2006/feb/09/jimmy-carter-the-culture-of-death/ Yes Dork, Japan could pull it off in the past with savings rate of 10%-15% it had enough to run huge budget deficits without borrowing much externally or causing much inflation. However, now the savings rate is about 2% as a result of persistently low interest rates and it is a matter of time when Japan has either to print money or go abroad to seek funds. with over 200% debt to GDP that’s gonna be some party, mate. @DOM K There is trouble because they have to import so much coal from Australia and Gas whereever they can get it. If they produced 50% of their own oil and all of their coal like the States their economic situation would be stratospheric. Japan is a very resourse poor country – its amazing what they have acheived with so little and so much disaster. If they can get the largest nuclear power plant up and running to full capacity again after the 2007 earthquake they will be on the road to recovery. en.wikipedia.org/wiki/Kashiwazaki-Kariwa_Nuclear_Power_Plant Portugal is going to miss its targets this year? Will they have the threat of not having the next tranche of bailout money hanging over them? I will see if I can find the full details later but busy at mo. If anyone knows a link please post. @ PR Guy Is this any use? http://www.ft.com/intl/cms/s/0/a3a144b4-f021-11e0-bc9d-00144feab49a.html#axzz1a1BZJYHB @ ceteris “On the difference between Ireland and Greece, Lewis said: ”The Irish just have a greater talent for suffering. If you imposed on the Greeks what the Irish have imposed on the Irish population, people would be getting shot.” I don’t buy that. What does Lewis know about Ireland other than that trip he made and Notre Dame football? Greece is getting the full neoliberal shock treatment. “I am used to living under different conditions, but now I’m being forced to change my whole quality of life,” said the 54-year-old secondary teacher, adding that salary cuts and tax hikes had seen her monthly net salary plummet by 40 per cent to €950. What are Irish teachers paid ? @all for those interested in how Irish MEPs voted or .. er .. didn’t vote on this ‘six-pack’ .. http://www.irisheconomy.ie/index.php/2011/09/30/three-and-a-bit-years-on-from-the-banking-guarantee/#comment-175094 @hoganmahew ‘Ireland and Spain stuck by the debt to GDP rule until their housing bubbles collapsed. Those bubbles were largely funded within the EU. The fallout from those bubbles is stress on the sovereigns. The bubbles were enabled by inadequate cross-border banking supervision and cross-border supervision of capital flows. These are a function of the centre – the periphery has no power to regulate these.’ Yes – need to keep on reminding people of this one – leading Ostrich in this space is, of course, Dear Lorenzo. And the band played Waltzing Matilda – while the ECB stood idly by … I would qualify your final phrase – periphery – in this case PD/FF did have some power but failed to act to moderate the fire – McCreevey, Harney, McDowell, Bowel Bertie et al threw yet more ideological paraffin on the fire …. in their own, and pals in the Gallimh_Tint, interests of course: us eejits now pickin up the tab. New bank stress test calculator http://www.guardian.co.uk/business/blog/2011/oct/06/european-debt-crisis-live The test is only giving Ireland an 8% haircut. JP Morgan are quoted in the FT today as saying a 40% haircut is appropriate. Anyone had a play with this yet? http://graphics.thomsonreuters.com/11/07/BV_STRSTST0711_VF.html […] week saw the final agreement on the new EU Economic Governance package. Philip Lane of Irish Economy relates this week saw the final agreement on the new EU Economic Governance package The overview is here. […] @David O’Donnell Faie enough – there were options open to local politicians and regulators and they not only failed to take them, but the went in the opposite direction and encourage speculative capital flows. Comments are closed.