Policy Research in Macroeconomics

Eurozone’s dangerous deficit fetishism – still boosting unemployment



It’s the European Commission’s season for receiving a harvest of draft budgets for 2017 from all the Eurozone states – and if need be rejecting the promised fruits.  The trouble is, the Commission is a particularly bad judge of the quality of economic ‘fruit’– because its testing gear (it effectively measures only inflation, budget deficits and public debt) has no way of judging the quality of what is being put to it.

Take the example of Spain.  Its interim government has submitted a draft budget which shows an overall budget deficit for the current year of 4.6% of GDP, which is estimated to fall to 3.6% in 2017.  Now let us recall that at its peak, unemployment in Spain was around 25%, and that as the economy has somewhat recovered, the figure has reduced to a still extraordinarily awful – to anyone but the European Commission – 19.5%.  It has fallen by about half a million over the last year.  Youth unemployment is still 43%.  The fact that it has run deficits each year well above the Maastricht 3% is a major reason why unemployment has fallen as far as it has to date.

So what is the response of the Commission, in the persons of Commissioners Moscovici (French socialist) and Valdis Dombrovskis (Latvian conservative)? Well, it is not along the lines that “while unemployment is so high, a reasonable deficit of less than 4% seems sensible…” which it undoubtedly is…  No, today’s (25th October) response went thus, in a curmudgeonly manner and without a single mention of unemployment:  

We are therefore seeking reassurances from the Spanish authorities in the coming days that the incoming government, as soon as possible upon taking office, will submit an updated draft budgetary plan to the Commission and to the Eurogroup, which will ensure compliance with the targets set out in the Council decision under Article 126(9) TFEU of 8 August 2016.

We note that the DBP [draft budget plan] projects a deficit of 4.6% in 2016, in line with the headline target under the EDP (Excessive Deficit Procedure], and 3.6% of GDP for 2017, which is 0.5% of GDP above the target. Also the achievement of the recommended fiscal effort is not yet ensured. This may entail risks for the timely and durable correction of the excessive deficit by 2018. The DBP also does not contain a number of compulsory elements. 

Back in August, the European Council (heads of government) had with equal insouciance as to the impact on employment called on Spain

…to reduce its general government deficit to 4.6% of GDP in 2016, 3.1% of GDP in 2017 and 2.2% of GDP in 2018. In addition to savings already foreseen, Spain must implement consolidation measures amounting to 0.5% of GDP in both 2017 and 2018. All windfall gains must be used to accelerate deficit and debt reduction, and Spain must be ready to adopt further measures should budgetary risks materialise.

Portugal has been treated as badly or even worse by the institutions, considering that its deficit is now under the Maastricht 3% limit – it is being required to have a deficit no greater than 2.5% of GDP in 2016, even though its unemployment level is still 11% (youth unemployment 28%).  

The EU Treaties give pride of place to Economic and Monetary Union, so one would expect the major attention, in relation to deficits, to be at the level of the “Union”.  If the European institutions would focus on this, they would see that the “problem” of an excessive deficit simply does not exist.  A press release from Eurostat on 24th October 2016 tells us that in Q2 2016 the “Seasonally adjusted government deficit [is] down to 1.5% of GDP in the euro area”.  

Recall that the deficit is the overall deficit including any borrowing for investment. Assuming reasonably that net investment is at about that level (unfortunately the figures are not broken down in this way), there is no current budget deficit at all in the Eurozone today.  So why on earth do the EU’s institutions worry about countries which are confronted with gigantic levels of unemployment having budget deficits that (a) help to maintain economic activity and (b) therefore reduce the level of that unemployment? Deficits, that is, which have no noticeable negative impact on the overall budgetary position of the Economic and Monetary Union? 

It is nothing but conservative deficit-fetishist ideology running dangerously amok. And it’s high time that Europe’s social democrats start to reject it, loudly and clearly. 

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