Sunday, December 11, 2011

Whats the matter with Europe (part 4)

This brings us to David Cameron, and what his veto represented on Friday. The proposed EU treaty that Cameron rejected would have imposed another set of "one-size fits one" policies on Europe. Specifically, it would have put in place rules- binding rules, mind you, for the fiscal policies of member states. Here are some excerpts:

"General government budgets shall be balanced or in surplus; this principle shall be deemed 
respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP. Such a rule will also be introduced in Member States' national legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation."

"A mechanism will be put in place for the ex ante reporting by Member States of their 
national debt issuance plans."

"As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed. Steps and sanctions proposed or 
recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed."

And the consequences of these requirement would be real. If you think I'm wrong, check this out.

"Why did Irish Budget Plans end up in Berlin?" is the headline, if you didn't click the link.

Some might not see a problem with this step toward European fiscal integration; why shouldn't European governments coordinate budget deficits and spending plans? Why shouldn't budget guidelines be put in place for a series of such interdependent economies? There is a compelling arguement to be made. But if the experience of the ECB is to be taken seriously, and experience suggests that it should, then it is not difficult to predict where this will lead: inappropriate budget deficit constraints in nations that, for demographic, security, or other reasons need to run a moderate structural deficit for a time. And just what would that "automatic correction mechanism" be if a country DID run a deficit of greater than 3% of GDP?

The lesson needs to be that asymetric economies, like those of Europe, are going to experience asymetric shocks- and that locking in binding and symetrical fiscal and monetary policies is only going to lead to policies that work for a few, and hurt many more. The Italians deserve better than that. The Spanish deserve better than that. The Irish deserve better than that. Hell, even the Greeks deserve better than that.

So David Cameron, probably without realizing it, took an important step on Friday when he stood up for his country's interest: he stood up to a German Chancellor who was attempting to impose a series of inappropriate constraints and mandates on a fractured and helpless Europe. And at the end of the day, isn't that what being the British Prime Minister is all about?

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