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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
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