Something Worries Me About Peter Bofinger

Really I realise I have been remiss in another important sense. I have long assumed that in fact the decision to reduce deficits was taken due to the coming fiscal pressure from ageing. This certainly was the background to the discussion. However now I look at the details of the SPG this area is not mentioned (as far as I can see) and the other – the free rider and associated – is the principal consideration.

So those who criticize the bureaucratic and infexible nature of the ECB are in the right to this extent. Of course the underlying demographics *should* be part of the pact, but that is another story.

I find myself in a tricky situation, since I am deeply sceptical that the euro can work, and now after the French vote even more so, but since it has been set in motion, the best thing is obviously to try and make it work (even while doubting). So I am thinking about all this. Obviously I should try and write a longer post making this clearer.

The SGP was adopted at the Amsterdam Council 1997. A history of the implementation of the pact, and a summary of the debate over the new pact can be found here. The Stability and Growth Pact was designed as a framework to prevent inflationary processes at the national level. For this purpose it obliges national governments to follow the simple rule of a balanced budget or a slight surplus.

Now if we go back to the origins of the pact, to the communication of the European Commission on 3 September 2004, you will find the following:

“As regards the debt criterion, the revised Stability and Growth Pact could clarify the basis for assessing the “satisfactory pace” of debt reduction provided for in Article 104(2)(b) of the Treaty. In defining this “satisfactory pace”, account should be taken of the need to bring debt levels back down to prudent levels before demographic ageing has an impact on economic and social developments in Member States. Member States’ initial debt levels and their potential growth levels should also be considered. Annual assessments could be made relative to this reference pace of reduction, taking into account country-specific growth conditions.”

Now curiously I have found nothing in Bofingers argument which seems even to vaguely recognise this background.

A good starting point for this topic would be the conference “Economic and Budgetary Implications of Global Ageing held by the Commission in March 2003.

The European Council in Stockholm of March 2001
agreed that ?the Council should regularly review the
long-term sustainability of public finances, including the
expected strains caused by the demographic changes
ahead. This should be done both under the guidelines
(BEPGs) and in the context of the stability and
convergence programmes.?

This document on the history of EU thinking on ageing and sustainability is incredible.
Continue reading

No-Win Situation For The EU Commission?

Italy’s Finance Minister Domenico Siniscalco is in defiant mood. ?The times of creative finances are over,?, he told a parliamentary committee in Italy today. By ‘creative finances’ he means a cost-cutting exercise. He means any serious attempt to bring the Italian deficit into line this year. What he is in fact saying is that he is prepared to try bring Italy’s deficit below 3 per cent of GDP in two to three years time (there are of course elections next year and Siniscalco in all probability won’t be in office to carry this through) but that he is not prepared to ?strangle? the economy by introducing an emergency budget next month.

This now becomes a very serious problem for the EU commission. After the defeat of the constitution in the recent polls, the Commission is badly in need of some credibility. After the ‘locura’ of recent days, the euro is badly in need of some credibility. Sticking to the Stability and Growth Pact would help to give credibility. But sticking to the SGP would also send Italy further into recession. This is known as double bind. Mr Siniscalco has Mr Almunia with his back to the wall. Of course the recent threat of a referendum is all about this.

According to the FT:

“Sandro Bondi, national co-ordinator of Mr Berlusconi’s Forza Italia party, complained on Tuesday about the European Commission’s ?bureaucratic attitude? to Italy’s public finances, and said it risked ?transforming Italy from a champion of a united Europe into a country pervaded with anti-European feeling?.”

I think this has a name, it’s called blackmail. Either you let us do what we want to, or we’ll make you pay for your efforts. I always thought we should have acted much, much earlier against Berlusconi. I hope we all don’t really regret being so tardy in waking up. To be continued.

Living in Denial

No this is not (yet) the title of one of my new pages (although we were looking into living in sin, but unfortunately it’s already taken). No the denial I am referring to is much nearer home for most of us, since it is up there in Brussels. “European Union nations are dragging their heels in their ambitious drive to become the world’s most competitive economy by the end of the decade” or so we are lead to believe from the EU annual survey published by the Commission on Wednesday.

This foolish piece of what the Spanish would call ‘chuleria’ (no easy translation but I suppose you could try vain self-important show-off bragging) – the pledge to overtake the US by 2010 – was adopted at the Lisbon 2000 summit. It was madness in its moment, now it looks just plain ridiculous.
Continue reading