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FT.com brussels blog: Europe's constitutions aren't the place for rules on deficits (17 May 2010)
But I'd like to draw your attention to a proposal from Marco Annunziata, the chief European economist at UniCredit, the Italian bank.  He suggests that fiscal responsibility should be "hard-coded into each country's legislation in the form of automatic, binding and unchangeable rules".  He cites the example of Poland, whose constitution sets a ceiling for public debt of 60 per cent of gross domestic product.  He could also have mentioned Germany, which adopted a constitutional amendment last year that will restrict budget deficits to 0.35 per cent of GDP from 2016 onwards.


It is an intriguing proposal, not far removed from what is already under discussion in German policymaking circles.  I see one or two difficulties with it.  One, as Annunziata himself points out, is that a government nearing the end of its term in office may push up spending with the aim of winning an election and - if it loses - leaving the subsequent, constitutionally decreed belt-tightening to its successor.  This is a recipe for bitter political conflict.

My second reservation is that constitutions are not, in my view, an appropriate place for eternal rules about economic policy.  Constitutions lay down principles of government.  They establish whether a country is a monarchy or a republic, a presidential system or a parliamentary system or a mixture of the two.  They guarantee inalienable human rights.  But they should not set out detailed formulae for economic policy, because no one can possibly know what economic circumstances will arise in the years after the constitution was written.

FT.com: Berlin weaves a deficit hair-shirt for us all (Wolfgang Münchau, 21 June 2009)

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.


I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.


Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany's lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Feb 1st, 2011 at 06:16:38 AM EST

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