Peter Sutherland and Fintan O’Toole disagree. Peter Sutherland’s FT article is here; Fintan O’Toole’s IT article is here. [Reminder – my own op-ed from a while back is here; while my DEW slides are here.]
Fintan O’Toole argues that the Fiscal Compact is anti-Keynesian. The treaty has to be read in conjunction with the “six pack” regulations, which allows considerable latitude for Keynesian fiscal policy:
The Council and the Commission shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort might be more limited in economic bad times. In particular, revenue windfalls
and shortfalls shall be taken into account.
So long as Keynesian principles are followed in good times (pro-active tightening to guard against overheating), activism during downturns is possible.
Fintan O’Toole (along with others such as Colm McCarthy) criticises the insertion of the structural balance concept in the treaty. Since the intention is to avoid the pro-cyclical dangers of using the overall balance (which would anti-Keynesian for sure), the structural balance concept is preferable. Since there will be inevitably a wide range of plausible estimates for the structural balance in any given situation, the Compact will only rule out extreme fiscal mis-behaviour.
The Fiscal Compact Treaty has been accepted by many social democratic parties across Europe. For example, Sweden was among the early adopters of fiscal rules, since its political system recognised the importance of fiscal sustainability in preserving the government’s ability to manage the economy.
Of course, it is obvious that the Fiscal Compact is only one of the required reforms in Europe, with the European-isation of banking policies, the introduction of risk-sharing mechanisms and the adoption of pro-growth strategies also important. In a sequential process, the Fiscal Compact increases the likelihood of other reforms down the line.
(I am offline the rest of today but will try to respond tonight.)
30 replies on “The Fiscal Compact – Views Differ”
I hope eventually this debate will reach down into the nitty gritty to discuss the shape of emerging Europe and how the ESM and Compact serve to build this dodgy structure 🙂
Both the elections in France and the ‘Compact’ in Ireland to help focus debate as well.
Its interesting to see how tangential the debate sofar has been with debate veering away from substance into ideological rancour on issues outside the Treaty.
There will be a lot of “rubbish-ometer [French deconnometre]” gain surrounding the debate complicated by those who don’t want the debate in the first place.
For example, in France, Hollande has threatened to change the Treaty. But he hasn’t come out and detailed changes he requires?
To my mind, it requires deep surgery, is a right wing manifesto for banking interests and is skewed unfairly towards the interests of the 1%.
The Compact endorses the looting of public services with the bill passed from the 1% for the 3%/60% burden onto ordinary taxpayers.
Its no surprise to see banking interests like Sutherland in Ireland out of the traps so quickly on this one.
“When Mr Sarkozy came to power in 2007, he introduced a “tax shield” that capped tax at 50% of all income.”
“Mr Hollande himself renewed his call on Tuesday, saying the 75% rate on people earning more than one million euros a year was “a patriotic act”.
I’d rather see greater focus in France and Ireland on the secrecy surrounding the ESM, the conditionality attached to sovereign support through the ESM, the structure and makeup and terms of bailout, independent regulation/accountability and democratic representation on the ESM.
So far proponents for the Treaty, in particular followers of Keynesian pro cyclical adjustment have tried to jellify and loosen the terms of the compact to dilute its more trenchant and explicit binding obligations.
But it would appear EMU is driving a more oligarchical and hierarchical, authoritarian agenda.
I look forward to more debate on the nitty gritty both in France and here.
I am pleasantly surprised by the points made in Fintan O’Toole’s article.
His criticisms about defining the structural deficit and the anti-Keynesian actually mirror the two main sticking points Economists had about the Treat at Croke Park on January 27th.
Even if I don’t personally believe it is a good enough reason to vote it down.
My one line comment on the IT page was in respect of this comment, which hasn’t yet appeared.
It is true that the 3% of GDP annual budget limit and the 60% debt ceilings are arbitrary limits but what’s important is the plan to give attention to other indicators. For example during the Irish bubble, there were many other indicators besides the two official ones that were flashing red including annual credit growth of up to 30%.
The EU isn’t a dictatorship and a country that is prudently run is not going to be crucified during a recession period. The evidence of stimulus measures from 2008 in several countries shows that.
As for Japan, its net debt after offsetting public pension funds is 139% and the gross ratio has risen almost every year since 1991.
The low yield of 1% does not imply market confidence in an economy hit by persistent deflation. Last January, the yield on British 10-year gilts fell to the lowest since 1703 but that doesn’t mean the UK economy is in good health.
The US also has a low yield and as with Japan, it has been helped by central bank purchases (when the value of a bond with a fixed interest rate rises, its yield falls).
A key aspect of Japan’s debt is that 95% is held locally; in the case of Ireland, Greece and Portugal, more than 70% of public debt was held by foreigners when they each got international support.
As regards the left-right issue, France last had an annual budget surplus in 1974 and whether left or right every year in almost four decades, the debt rose.
The debt ratio rose from 22% in 1975 to 82% in 2010 and is expected to be close to 90% in 2012 – – the net debt ratio will be 84%.
An economy eventually ends up with a high interest rate burden and when it needs to spend in a recession period, it has to pay a high rate for borrowings or the investors go on strike.
Finland like Ireland has been in the euro system from the start. Instead of SSIA bonanzas, it set aside a lot of funds for the rainy day. Twenty years after its collapse in the aftermath of the breakup of the Soviet Union, it has no net debt.
This year it will have surplus funds of 57% of GDP. It doesn’t have to blame the euro.
I would hazard a guess that this will have an interesting bearing on the future of the FC.
Ireland is not Finland. People seem to constantly be amazed how different nations….differ. Nor is Ireland germany. Nor is germany Europe.
The FC is a lovely idea but tying oneself constitutionally to an immeasurable concept is hardly sensible is it?
Of course this would seem to have calamitous consequences if you are a kndred spirit of Pritchard.
Keynesianism needs to start in the Boom.
That never happened. So you are reliant on ‘the kindness of strangers’ to fund Keynesianism over and above the current, significant, deficit.
It may give everyone a view as to whether the European Commission will impose fines on Spain under FC rules for a breach of agreed budget limits.
“The Irish are not fools” declares peter Sutherland.
No? Our genius alone has obviously brought us to the point of bankrupcy!
“So long as Keynesian principles are followed in good times (pro-active tightening to guard against overheating), activism during downturns is possible.”
I see what you are saying and I understand the ambiguities of various Keynesian-isms, which is used to mean both specific economic policies and a very broad approach to managing the economy only loosely related to those specifics. Nevertheless, “Keynesianism” as it has actually been practiced in most countries has not required the “so long as” proviso mentioned here. So there is something of the pizza-is-not-banned, you can eat as much pizza as you like, so long as you run a half-marathon once a week, in this sort of response to F O’T.
Personally, I’m surprised at the level of economic illiteracy in the Fiscal Compact – this is stuff that a first year undergrad should be able to rubbish.
The whole thing mistakes the symptom (deficits) for the cause (lack of proper management of government finances). It mistakes the financial markets’ rules of thumb in the absence of proper management of government finances for proper management of those finances (in particular the primary surplus, which while mathematically compelling is economically meaningless). And by bringing rules to an area where flexibility is key, it mistakes fiscal policy for monetary policy.
(More of the same available here: http://www.ronanlyons.com/2012/03/05/send-merkozy-back-to-econ101-economic-illiteracy-and-the-eu-fiscal-compact/)
Oh, and Irish people should vote yes. Honestly.
Japan as the second and now third largest economy in the world is still in a position where the Yen is seen as a sound currency even though the debt ratio is over 200%. The reasons are numerous but there are two that stand out, Japan is not Italy in that it has not debased its currency a dozen times since WW2 and it has total control of its own fiscal policy and has the heft to move markets world wide, up or down as it chooses. Japan is still a manufacturing powerhouse right up there with Germany. The risk of a PIIGS like melt down in Japan are relatively low.
The Irish Gov’t could very easily have avoided a referendum and the consequences could have been handled in various courts for the next five years. Ireland is in trouble today and it is of the utmost importance that the ECB tap remain open now and for the next few years. When the Gov’t back stopped the banks we chose to lay in a bed of thorns for a decade at least. The die is now cast we are now in over our heads and the only life boat within sight is the EU/EC/ECB and its 1% loans whether they be short, medium or long term. Open market rates for Ireland in its present predicament would exceed 8%. After our departure from the EZ conditions are likely to deteriorate in the short term. Why would a Gov’t with a splink of sense expose the country to ruin when there is a better than 50% chance we can get through this, painful as it will be, without sinking into abysmal poverty accompanied by societal breakdown.
Our Gov’t is playing cowardly politics when it opts for a referendum, they should have enough sense to know that if the vote is no, they will fumble and bumble their way into another referendum. As the farce continues we will not know whether to laugh or to cry but prospective investors will certainly know enough to avoid a country governed by dilettantes and the people that elected them.
What is the purpose of the fiscal compact.
Why should one country care if another is ‘profligate’. Surely the ‘profligate’ will not be able to repay funds and then it will default. What is so wrong with that outcome. Is that not the normal outcome of the ‘markets’?
My own belief is that the fiscal compact and the necessity for it serves only one purpose. Keep states solvent so that creditors countries can get their money back.
In addition by monitoring, controlling and directing expenditure, the system can allow certain surplus expenditure to remain in each debtor country, so that surplus production from creditors can continue to be purchased.
The self evident purity of the fiscal compact is a ruse, a diversionary tactic, to obscure the real purpose of the compact.
To keep the money flowing towards surplus countries.
Finland is in a lot of trouble because of its botched EPR Nuclear project – the first European Nuclear project in a liberalised energy market………….funny that.
There appears to be a lot of cost cutting amongest the various players in this Turnkey project which has created catostrophic delays.
(In a closed state money system it would not matter if you overpaid the best state contractor or employee available – the money would be recycled into the system)
But when you get the Caribbean connection rather then the French connection of untaxed revenue via newly privatised utilties – thats where the breakdown begins.
This from the IEA explanation of the absurd Finance structure which was traditionally funded via goverment defecits but because of the maastricht mania means unleveraged money is bad , credit money good………
Very advanced gobbledygook to cover the credit crimes of the eurosystem me thinks.
See page 104
Its not so much about the amount of money you spend – its the quality of that spend
2005 Irish Buildings & construction : 33.405 Billion
2006 : 38.037 Billion
2007 : 36.582 Billion
Total : 108.024 Billion
= dead concrete = implosion of economy = sociological collapse.
More on One of the Precious Figure of Eight ….
But who are the members of the European arm of the institution which is so powerful in Washington that it is referred to as “government Sachs”? The key figure is Peter Sutherland, chairman of Goldman Sachs International, the bank’s London-based European subsidiary. The former European commissioner for competition and ex-chairman of BP, is an essential link between the investment bank and the 27 EU member states and Russia. In France, Goldman Sachs benefits from the support of Charles de Croisset, a former chairman of Crédit Commercial de France (CCF), who took over from Jacques Mayoux, a government inspector of finances and former chairman of Société Générale. In the United Kingdom, it can count on Lord Griffiths, who advised former prime minister Margaret Thatcher, and in Germany, on Otmar Issing, a one-time board member of the Bundesbank and ex-chief economist of the European Central Bank (ECB).
MatrixsQuidesque …. in whose interests?
Methinks ‘undergrad’ is pitching it a bit high …. more suitable for high infants or advanced junior infants …
“Our Gov’t is playing cowardly politics when it opts for a referendum, they should have enough sense to know that if the vote is no, ”
It will not be a no vote. Ireland will pass the fiscal compact because Ireland fears the limbo that will result if she votes no.
While I would dearly love to poke the authors of this stupid compact in the eye, Ireland should sign it.
The simple reason is that it is irrelevant. It is an economic joke.
It is already a political joke, given the Spanish PM’s public ridicule of it, in the immediate aftermath of signing. It has already been contested in the ‘Letter of Ten’, most of whom are signatories.
Ireland should not get uptight about this fraudulent and deceitful document.
Most of the signatories to the fiscal contract have all the sincerity of Las Vegas wedding couple.
Within a few years it will be in the dustbin together with the rest of the failures over the last few years. It may indeed drag the Euro into the dustbin with it.
When there is a rush to judgement in any area, it is usually wrong. For a dispassionate consideration of the issues cf. this paper by Seamus Coffey. (It is also a useful antidote to thinking that our problems are anything other than homegrown).
cf. also my comments on the other thread.
A blast from the past!
I am not so sure about that – I concede most of the power has been given to Mordor but he always wants more.
The scouring of the Shire will never be enough – he wants total destruction , total obedience.
remind you of anything does it ?
The Fiscal Compact basically eliminates the flexibility allowed by the SGP/6-pack. For Germany that was the point – the correction mechanism is automatic, and not subject to a debate, unlike the current debate between Spain and the EU Commission. Eliminating this flexibility is a bad idea.
You seem to think that any plausible estimate of the structural balance will do. The estimate that matters is the one used by the EU Commission. There is already a methodology used by the EU Commission for this, as this has been required for the medium term objectives part of the SGP. Apparently this methodology is not public information, or at least one paper I read on this (written in 2010) complained about the secrecy and lack of transparency on this. The Irish DoF view on these estimates of the structural deficit are that they are “not plausible”. Using an unmeasurable quantity, determined in a non-transparent way, as the trigger of automatic corrections and sanctions is a very bad idea.
Sweden has had its own fiscal responsibility rules for a long time and they have worked well. However Sweden only signed up to the Fiscal Compact treaty when it was made clear that the Fiscal Compact treaty rules do not apply to them. In fact there are no fiscal obligations on any non-EZ state if they sign up. Had the Fiscal Compact rules applied to Sweden they would not have signed up. The Swedes think their fiscal responsibility rules are better than those in the treaty, and most would probably agree with this.
It makes no sense to enshrine such a deeply flawed treaty in the constitution. Those proposing a “yes” vote seem to think that the inconvenient bits of the treaty will be ignored or otherwise fudged, and that the consequences specified by the treaty won’t apply. To me that is just wishful thinking.
Martin Wolf pitches in:
‘The pain in Spain will test the euro’
“It does make economic sense to target cyclically adjusted rather than actual deficits. But the improvement in economics is at the cost of a reduction in precision. Nobody knows what a structural deficit is.
“This is no quibble. Consider the structural fiscal positions for 2007, the last largely pre-crisis year, estimated by the International Monetary Fund in October 2007 – in “real time”, as it were. This was a year when the indicator needed to scream “crisis”. Yet it showed Spain with a large structural surplus and Ireland in structural balance (see chart). Both were even in better shape than Germany. Greece did have a sizeable structural deficit. But the French deficit was worse than that of Portugal. The rule would not have discriminated between vulnerable countries and immune ones because it ignores asset bubbles and financial manias.”
Peter Sutherland is certainly a poor spokesperson for the Yes campaign. To give him credit, he excels at self-promotion and has done a good job as the public face for rampant no-holds-barred profit-making at Goldman Sachs International. But in terms of economic analysis he has an extremely poor track record, repeatedly getting things wrong. Even when he advocates the right decision, as in this case, he uses wrongheaded analysis. The fiscal compact should be signed so that Ireland stays a full-fledged member of the Eurozone and EFSF, not because it encompasses any sensible fiscal strategy that will ensure Eurozone stability. It will not guarantee stability, and might actually weaken Eurozone stability, but the deal is done and Ireland desperately needs to stay a member of the club, with full borrowing rights.
some of the comments underneath the article are worth reading as well
Le Keynésianisme devient-il hors-la-loi?
7 March 2012 The Irish Times Dublin
L’Irlande sera le seul pays à soumettre le pacte fiscal de l’Union européenne au vote populaire. Mais ce qui se joue, en réalité, dénonce l’éditorialiste Fintan O’Toole, c’est la transformation de l’idéologie néolibérale en loi immuable.
“… le crime fondamental qui contenait tous les autres. Crime par la pensée, disait-on.”
George Orwell, 1984
Hollande vs Sarko l’Américain
Lots of views differ.
Philip’s dismissal of objections to the inclusion of the structural balance target,
“Since the intention is to avoid the pro-cyclical dangers of using the overall balance (which would anti-Keynesian for sure), the structural balance concept is preferable. Since there will be inevitably a wide range of plausible estimates for the structural balance in any given situation, the Compact will only rule out extreme fiscal mis-behaviour.”
reads as superficial in not addressing the kinds of problem raised by Martin Wolf, already cited by Gavin K above:
Text from Blind Biddy:
‘In Frankfurt for International Women’s Day – We’re gonna have a Bonfire of those Fiscal Corsets … home soon!’
A hypothetical scenario:
Suppose 5 countries reject the compact, 11 countries ratify the compact and Ireland ends up being the decider. What should Ireland then do? Ratify or reject?
& does fines also apply to countries in programs or are they only for countries outside of programs but in violation of the rules?