European politics – Page 12 – The Irish Economy

Today saw contributors to this blog John McHale (wearing his IFAC hat), Alan Ahearne, and Karl Whelan, as well as TASC’s Tom McDonnell appearing before the Joint Committee on European Affairs.

Colm Keena reports on the committee proceedings here. The transcript of the discussion will be up here fairly soon. Update: Karl’s remarks are here. Update 2: Tom’s remarks are here. The divergence in viewpoints is fairly obvious from the reporting, with Alan and John thinking the fiscal compact is the way forward, Karl thinking in practice it’s a done deal anyway and even though rule sets like this make little sense (which Colm McCarthy hacked away at in a previous post), we should sign it. Tom didn’t think it was a good idea at all.

Karl’s point on macroeconomic thinking is worth expanding upon. He is quoted as saying

“What is noteworthy about the new EU fiscal compact, however, is that it does not correspond to mainstream thinking among economists as to how an ideal fiscal policy framework should operate.”

I think this is an important point to make. You don’t see discussions about balanced budgets from year to year in macro textbooks because for very large economies they just don’t make sense. Even cyclically balanced budgets, where you save during the surplus years and spend during the deficit years, is a bone of contention between Keynesian and non-Keynesian economists (how’s that for a sweeping generalization?). Most macroeconomists will tell you that measuring a cyclically adjusted quantity like the budget balance is no joke, as this paper (.pdf) by Girouard and Andre sets out in some detail.

Karl is also reported as saying that:

“Structural deficits were a theoretical phenomenon and establishing legally binding rules about impossible to measure quantities was sure to create trouble sooner or later. He thought the rules would lead to more austerity across Europe than was required.”

So to summarise: arbitrary targets for at best very difficult to measure quantities don’t make much sense.

Now on the other side, having read the text of the treaty a few times, I think that what the fiscal compact treaty really tries to do is to reduce the chances for poor fiscal policy in one country affecting another country, and the rules as well as the budgetary oversight and coordination, as well as multi-year budgeting, are there to enshrine such good fiscal policy by making poor fiscal policies harder to enact. No bad thing on paper, but in practice, especially with a particularly harsh set of austerity policies, the fiscal compact may end up doing more harm than good.