Compact Explanations of the Fiscal Compact and Cyclical Adjustment of the Budget Balance

The new ECB Monthly Bulletin includes handy summaries of the Fiscal Compact and Cyclical Adjustment of the Government Budget Balance  (Boxes 12 and 13; pages 101-105)

16 replies on “Compact Explanations of the Fiscal Compact and Cyclical Adjustment of the Budget Balance”

We have to come to terms with the fact that the people behind the curtain want to sustain somehow the post 1987 model of capital export from Europe towards Asia , South America etc.
They can then use Europe as a pleasant base of operations for their demonic tax / labour /energy arbitrage operations.

THEY ARE NOT INTERESTED IN REAL CAPITAL FORMATION WITHEN EUROPE as it is probally less profitable for their global operations – although it is destroying global wealth & happiness on a gigantic scale.

They have usurped our common capital base for their devilish games.


To push through the fiscal pact she has envisioned for Europe, German Chancellor Angela Merkel will require two-thirds majority support from Germany’s states. But leaders in Baden-Württemberg have complicated approval by saying they will link backing for the pact to conditions that include a greater say over taxation decisions.

The fiscal pact that Merkel spearheaded and negotiated with EU leaders in Brussels obliges 25 member states to greater fiscal discipline and to pass balanced budget legislation that would prevent them from spiralling into debt as Greece did. Friedrich said he feared the fiscal pact would require German states to balance their budgets earlier than planned under a constitutional amendment passed in Germany in 2009. Under that legislation, the states will be strictly forbidden from new borrowing starting in 2020, and the federal government’s ability to create new debt will also be sharply curtailed.

“If this has to happen faster, then the federal government is going to have to propose a national consolidation package,” Friedrich told the Süddeutsche. “That also means that the federal government has to stop borrowing and that it has to provide a greater share of tax revenues to the states than in the past.”,1518,821544,00.html

SPD and Greens are also linking support to a deal on Financial Transaction Tax … 2/3 majority needed in our Bundestag ….

No need to rush that Referenum on the ‘Corset’ … Festina Lente …

Picture of the Month – and a must_read

Luxembourg Prime Minister Jean-Claude Juncker (right) with Spain’s Economy Minister Luis de Guindos at the finance ministers’ meeting on Monday: Despite recent progress, the euro crisis isn’t over yet.

The other euro-zone governments have at most a few more months, perhaps only a few weeks, before the situation in Greece worsens again. They must use this time to make clear that Greece is the exception within the euro zone, not the rule. The other euro states must quickly arrive at a point at which the fate of Greece simply isn’t relevant for the future of the euro — which of course doesn’t mean that the Greeks should be left to their fate.

That means that Portugal, Spain and Italy, the three other problem countries in the south of the euro zone, must perform the magic trick of stimulating growth while reducing their budget deficits. That can only succeed with a lot of pragmatism — austerity without growth is as pointless as growth without austerity.

That pragmatism also means that the other European finance ministers should keep calm in reaction to the news that Spain has revised up its projected 2012 budget deficit to 5.8 percent from a previously forecast 4.4 percent. Spain, too, is in a deep recession. It is an impressive feat even to have reduced new borrowing at all — in 2011, Spain’s budget deficit was 8.5 percent of GDP.,1518,821404,00.html

Why are we even talking about this treaty?
Why not put it off until the Autumn, anything could happen before that.
Spain is turning bolshie, Holland realises that they will be banjaxed by this, Greece will default before the end of the year, France will have a new President, Britain will be in recession, Europe will be in recession, German exports will be hit, ECB will print more money than we can count.
By Autumn, passing this treaty will be the least of our or Europe’s worries.
Just follow the European plan, kick the can down the road!

The SGP has had two major revisions, the first in 2005, and the second a two year process that ended Nov 2011. So you could say that Version 3.0 was released at that point. The Fiscal Compact can be looked at as a hastily put together Version 3.1, which adds the auto correction mechanism and limitations on allowed deviations to the adjustment path (a version which in my view adds some bugs rather than useful features).

There are, however, some important features of Version 3.0 that are not getting much airtime, one of which is the expenditure limit. Seamus Coffey has a good post on this. Like all Version 3.0 features, they will apply whether Ireland votes yes, votes no, delays a few months, delays a few years or never votes on the FC. The post shows that, beginning with an Irish government expenditure level of 28bn in 2000, the allowed expenditure in 2007 would have been 44bn, in contrast to the actual 65bn that was spent. So this rule would have made a huge difference. The idea is to force surpluses in the good times, to allow deficit spending in the bad times (and it is this deficit spending the FC is doing its best to prevent). It would be interesting to extend the analysis forward from 2007, and to see what, if any, impact this rule might have in the next decade or so.

The other main feature of Version 3.0 is the excessive imbalance procedure (EIP), which also warrants more attention than it is getting.

The ECB spend a lot of time discussing the “limitations” of the structural/cyclically adjusted deficit concept, now a cornerstone of the rules. I am completely mystified why economists cannot develop procedures that will lead to counter-cyclical policies that are based on measurable quantities (e.g. level, rate of increase, or acceleration of actual GDP/GDP averaged over past periods of time) instead of a solution that requires accurate predictions of all sorts of things in the future.

In the past it was said that “economics is the science of confusing stocks and flows”. Perhaps this should be updated for the 21st century so that “economics is the science of confusing stocks and flows combined with the inability to model feedback loops”…

I see John McHale is doing his bit for Official Ireland in today’s IT:

All this stuff is providing a great opportunity for the economists to indulge in some intellectual masturbation in public. Do they not realise that most of the public find this confusing, disturbing and, probably, a tad distasteful?

There’s a very simple messaage here that I reckon most people would understand – stay well back from the edge of the fiscal cliff, so that if things go pear shaped there’s some space that you can grab on to so that you won’t teeter over. It’s not possible to measure precisely for each economy how far back it should stay from the edge of the cliff, but it would be better to err on the side of caution. And the smaller and more open an economy is the further back it should stay.

Ireland spent some years dancing close to the edge of the fiscal cliff and when things went pear-shaped it came close to falling off. At the moment it’s being suspended off the edge by the official support package and trying to get back to the edge of the cliff. Once it gets there it will have to keep working its way well back from the edge.

But while Ireland is being suspended off the edge by this support package and slowly being swung back to some solid ground, the machinations of the EU’s Grand Panjandrums about how far away economies should stay from the edge of the cliff and how they should in some way collectively enforce the distances from the edge they decide for each economy is totally irrelevant for Ireland.

It’s a total disgrace and an utter insult to the Irish people that they are being asked to decide on this matter in the near future while the wrangle between the Commission’s Community Method approach and the inter-governmental approach being pursued by the Merkozy twins has not been sorted out. It is even more disgraceful and insulting that they are being embrolied in pandering to the whims and prejudices of right-wing and right-wing leaning voters in France and Germany.

All Irish effort should be focused on getting back on to solid economic ground and moving back from the edge of the cliff, rather than being distracted by this premature requirement to ratify this ‘pact’.

And this effort should be accompanied by a recognition that the policy and regulatory dysfunction that almost pushed Ireland over the edge of the fiscal cliff was not confined to specific areas of fiscal policy and to bank supervision and financial regulation. It remains endemic in most other sectors subject to state direction and regulatory control. This endemic dysfuntion will have to be addressed or ireland will really struggle to get back on to solid ground.

@Paul Hunt
“All Irish effort should be focused on getting back on to solid economic ground and moving back from the edge of the cliff, rather than being distracted by this premature requirement to ratify this ‘pact’.”


Asking the people to give their consent (or to withhold it) on some matter or other is, and should be, of great significance. The contortions that Official Ireland is performing, partly to conceal, but mainly to perpetrate this abuse of the democratic process should disgust, anger and rouse to action every genuine democrat.

But Irish people should also ask themselves why they are being asked directly to decide on these matters when most other mature, established democracies have properly functioning parliaments that discharge these matters in the interests of their voters.

@ Paul Hunt

Re link to IT, expect to see lots of these panegyric
genuflections to Yes, compact me too, please, over the coming months

But John in his closing par does say

” Fiscal Responsibility Bill should be published as soon as is feasible to ensure a properly informed debate on the complete new fiscal framework. ”

I also look forward to the publication of that mysterious document, but I expect delayed expectations.

John does soldier on in his defense of the Compact

“It is not a coincidence that the ECB’s massive programme of longer-term funding for euro zone banks – which has also indirectly shored up sovereign debt markets – came after the fiscal compact was agreed by European leaders in December. ”

There’s a lot more in that paragraph than meets the eye. Think of European banks eg Irish Anglo, in fact, banks scattered across the core and periphery
in the vast euro casino betting debt by the armfuls
eg in Spain, Ireland on dud bubble property booms, or Greece, under the counter Sachs inspired debt riddles, or hurtling deficit spends even in the core itself.

This currency model before its implosion modeled on the core asset surpluses being made available to peripheral asset liabilities. Investment through access to low ‘Deutschmark’ interest rates converted to low euro interest rates was given to the peripheral economies who proceeded to pour the freely available money, down the drain.

Unfortunately, the result was on par with money handed out to subprime mortgage lending in the US. Instead of writing off the loans involved, the ECB through a system of debt brakes, Stability @ Growth Pact 3% 60% edicts, has attempted to get its money back. Efforts to do so, through ‘Compact’, the ESM, EFSF all rely on further debt foisted upon economies facing into higher taxation, budget cuts and more austerity.

This policy could have worked if and only if the original lending was not toxic and subprime and had not been wasted eg on useless property booms; it was not spent on a viable economic model that could make real jobs in the economy. Jobs created in construction, financial services industry, were transitory.

In order to revive their ailing fortunes, many of the peripherals have to completely revise the economic model upon which their economies are built. This is being done using the instruments of emigration, unemployment, austerity. Weakened by this process, they cannot achieve the levels of growth required to pay off debt.

The debt write down that has occurred in Greece will happen elsewhere and will lead to the breakup of the euro. Neither Greece, Ireland, Portugal, Spain or Italy, or the core can withstand exposure to these economic conditions for very long.

The economic model upon which the euro currency is based simply does not work. When the brief LTRO surge is over and all ECB ammunition is exhausted, bond spreads will steadily rise again against members of the EMU.

It is delusional of Ireland to sign up to the ‘Compact’ that will make matters a lot worse for us, remove our room for manoeuvre, erode sovereignty, hand the economy to those who will turn it into a debt agency for European banks.

Sorry for the long witter, tks for John McHale, who deserves a compliment for putting his thoughts on paper and welcoming debate; unlike many others, who prefer to lie hidden in the long grass 🙂

@ Paul Hunt,

Re “they are being asked directly to decide on these matters when most other mature”

Errr, because the Attorney General, Máire Whelan SC, who’s job is to provide legal advice to the government, believes there is a conflict between the ‘Compact’ and the Irish Constitution, so that any decision the government may make on the matter can be overturned, unless otherwise the “Compact’ is approved by referendum….

We are not yet at the point where the Irish Constitution can be overturned by EU Law, but we’re getting there; though some would argue Brussels should completely takeover the place to clean up mess made by Irish politicians?

@Colm Brazel,

I’m pretty sure there’ll be a post very soon on John McHale’s op-ed. That’s usually the most effective means of killing a thread that might be heading in a direction that is not considered congenial.

Official Ireland is worried. The Government had little option but to accept a referendum because this pact emerged from outside the Treaty governed processes – even though the Commission is pedalling furiously to pull it all back in to these processes. If the whole thing wasn’t being driven by the Merkozy twins’ re-election objectives it could have been developed entirely within the Treaty-governed processs – and there would be no requirement for a Constitutional Amendment in Ireland. The Government also thought it was being clever because the noise generated during the campaign might force the ECB to back down on the PNs/ELA.

It now runs the risk of falling foul of all the voters who are very annoyed over the state of the economy, those who will always vote no to anything with an EU stamp on it and those who object to its abuse of the democratic process.

Official Ireland is right to be worried.

@Colm Brazel

The economic model upon which the euro currency is based simply does not work. When the brief LTRO surge is over and all ECB ammunition is exhausted, bond spreads will steadily rise again against members of the EMU.

It is delusional of Ireland to sign up to the ‘Compact’ that will make matters a lot worse for us, remove our room for manoeuvre, erode sovereignty, hand the economy to those who will turn it into a debt agency for European banks.

+1 That is it in almost one.

As a recovering Euroholic, there is another strong reason for rejecting the compact – the way in which it debases the formerly mildly progressive ideas of the EU and undermines its political legitimacy.

The staggering cynicism and opportunism of Merkel’s Fiscal Compact stroke and the general self interested gutlessness of the EU institutions has to be confronted if Ireland is to have a future in the EU.

Imagine being the leader of the EU’s largest country in the midst of the EU’s biggest crisis since its foundation. You decide not to address any of the underlying causes of the crisis (because all the flaws suited you and were in fact crafted for you) and you decide instead to prevent other countries from recovering unless they make your own “faith based” domestic political agenda part of constitutional law in their own countries. Merkel made a determination to strengthen the electoral position in Germany of the CDU by inflicting harm on others.

She and her craven European counterparts, more keen on shows of unity and strong determination than on solutions, are as much the villains of this piece as the banks and the ECB. She is our Thatcher, and we did not even elect the monster.

Comments are closed.