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Do you think large budget deficits are always a good thing?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Feb 12th, 2010 at 03:10:42 PM EST
[ Parent ]
I think insufficiently large budget surpluses in the growth phase are a bad thing. The GSP justified complacency on that front.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Feb 12th, 2010 at 03:13:30 PM EST
[ Parent ]
the GSP was not sufficiently strict?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Feb 12th, 2010 at 03:36:05 PM EST
[ Parent ]
The GSP was too strict in the recession and insufficiently strict in the expansion.

But this is because it failed to properly allow for the business cycle. It is predicated on the assumption that the downward part of the cycle is an outlier.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 12th, 2010 at 03:45:58 PM EST
[ Parent ]
See here
the GDP growth rate swing between peak and trough can be as much as 8% or more.
So, if the deficit limit is 3% what is the guideline yearly budget surplus governments should be running? 5%? A 3% debt limit assumes the GDP rate swing will be something of the order of 4% and is a consequence of bullshit "great moderation" "we tamed the business cycle" "small government" neoliberal bullshit.

It makes a whole lot more sense to have an over-the-cycle guideline and to force states to run budget surpluses in the growth years instead off saying that a 1% deficit when GDP is growing at 4% is A-OK just because the deficit is less than 3% and the debt less than 60%.

Also this
the neo-liberal ideologues entered the fray, driven in part by political prejudices that go back into time (particularly World War 2), and conjured up the Stability and Growth Pact (SGP). The restrictions imposed by the SGP were claimed to reflect economic sense but there is nothing in any economic theory that tells us that the design principles of the SGP were optimal.

In fact, from the perspective of modern monetary theory (MMT) the 3 per cent budget deficit to GDP rule is nonsensical. It would be an extraordinary coincidence for a 3 per cent ratio to be consistent with full employment - that is, taking into account the saving preferences of the households and the trade accounts for each country.

In a 2006 book I published with Joan Muysken and Tom Van Veen - Growth and cohesion in the European Union: The Impact of Macroeconomic Policy - we showed that it is widely recognised that these figures were highly arbitrary and were without any solid theoretical foundation or internal consistency.

The current crisis is just the last straw in the myth that the SGP would provide a platform for stability and growth in the EMU. In my recent book (published just before the crisis) with Joan Muysken - Full Employment abandoned - we provided evidence to support the thesis that the SGP failed on both counts - it had provided neither stability nor growth. The crisis has echoed that claim very loudly.



En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Feb 12th, 2010 at 03:21:27 PM EST
[ Parent ]
but there is a counter argument that a simple rule like "no more than 3%" is simpler to police (even if only through naming and shaming) and does have some basic logic (given expected gross growth rates, it avoids runaway debt most of the time).

And in that way it did work to a good extent - and thus fulfilled Juncker's claim of the "beginning" of some economic governance in the eurozone.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 12th, 2010 at 03:39:19 PM EST
[ Parent ]
For how many years has Germany been allowed to breach the 60%-GDP debt limit?

The argument is the 3% limit only allowed for a shallow business cycle.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 12th, 2010 at 03:47:58 PM EST
[ Parent ]
Federal-level economic governance is not supposed to be geared towards the good years.

Any moron (except, apparently, Silvio Corruptioni) can manage an economy during the good years. Which is what Bush the Lesser and his friends capitalised on.

But I think that the reference to Corruptioni touches the nub of the issue: The reason we have the GSP is that Germany didn't want to hand Italy the power to run €-denominated deficits indefinitely. And while I can't say I blame them for that, I do think that the solution would be to not include Italy in the €-zone, rather than making up some ad hoc criteria with little connection to reality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 12th, 2010 at 03:55:05 PM EST
[ Parent ]
But, to include or not include countries in the eurozone is the sort of question that makes the eurozone an excellent free trade area but not really a political union. The reality is that it's still going to be incredibly hard for German or French or any taxpayers to pay for Greek taxpayers, even though that kind of solidarity would seem to be required with a convergence of economies, in a totally integrated union.
by Upstate NY on Fri Feb 12th, 2010 at 06:46:40 PM EST
[ Parent ]
Politically it should be easier to do than for Iceland, Greece actually being in the Euro and all, but somehow I doubt it will be.

I wonder how Germany's treatment of Greece will influence Croatian [just to name the presumed next entrant] feelings about EU accession, and whether Germany cares.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 13th, 2010 at 02:29:42 AM EST
[ Parent ]

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