The future of the euro does not depend on rigid debt limits

Even if this rule does not call for drastic debt reductions, Greece, Spain and Italy would have to adhere to a consistent consolidation course for several decades in order to at least get close to this limit, which was ultimately set arbitrarily in 1992. When the Berlin traffic light government writes in its coalition agreement that the stability pact does not have to be fundamentally changed because it has proven to be sufficiently flexible, this is window dressing.

30 years ago, the fathers of the euro agreed in principle that the euro states should feel obliged to pursue a solid financial policy in order not to be able to thwart a common, stability-oriented monetary policy. Without such a commitment, there would not have been a political majority for monetary union in Germany.

At the beginning of the 1990s, a debt ratio of 60 percent corresponded to the average national debt of the participating countries, plus a generous premium. When the Maastricht Treaty, on which this pact is based, was passed in 1992, the debt ratio in France was 40 percent in relation to overall economic output; in Germany, which had just been united, it was 41.5 percent.

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With a deficit ratio of 3 percent and a nominal growth rate of 5 percent, which was not unusual at the time, any debt ratio approaches 60 percent. This determination was therefore purely pragmatic and related to the situation; there was no economic justification for this.

Compromise between different political orientations

The problem with binding rules is that the conditions under which rules were found and adopted are often no longer present when these regulations are supposed to take effect. For example, the European Stability and Growth Pact was once pushed through by the federal government against the will of a number of other potential member states of the future European Monetary Union, but was watered down in 2003 at Germany’s urging.

Fixed rules for financial policy action are due to the distrust of democratically legitimized politics, which would often tend to make situation-dependent decisions – not least to secure an upcoming election.

This rather critical view of politics legitimized by free elections can be found above all in the central and northern European states. Great Britain’s exit from the EU severely weakened this bloc.

This view is contrary to the tradition of France or the southern European countries. The primacy of politics applies there more than the execution of what was once considered economically correct and thus of what was supposedly “objectively required” – especially since there is no lasting proof of the lasting superiority of rule-based politics.

The author

Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.

A clever compromise between these very different policy orientations is difficult to achieve. As a result, quite rigid rules are agreed upon – but hardly anyone feels obliged to stick to them.

Lessons for Europe

One possibility would be to relax the rules in the hope that all euro states would be headed by politicians who, out of their own conviction, pursue a stability-oriented economic and financial policy. Experience has shown that the political implementation potential of clever reforms increases when one camp occupies positions of the other side and garnishes them with their own accents.

This was both a successful concept of the social-democratic Chancellor Gerhard Schröder with his Agenda 2010 and his successor Angela Merkel (CDU) with her largely social-democratic or green-looking policies, such as the abolition of conscription, the establishment of same-sex marriages, the exit from the nuclear energy and the liberalization of immigration.

In the USA, the metaphor “It took Nixon to go to China” has become established for such a policy. Because only the well-known anti-communist Richard Nixon was able to improve diplomatic relations with China without being suspected of false sympathies. The question arises: What lessons can be learned from this for Europe?

On the one hand, it should be clear that generally applicable, rigid budgetary rules cannot work for the 19 euro countries, let alone for all 27 EU countries. This is not possible without a sufficient degree of flexibility.

Mario Draghi

If Italy achieves the turnaround, the prime minister’s course could become a model for other troubled euro countries.

(Photo: Reuters)

However, the pandemic has shown the limits of expansive fiscal policy: the ECB, as the savior in need, has been forced to buy up almost all government bonds from euro countries that it can get hold of for some time. In doing so, the ECB has presumably saved some countries from a fiscal crisis, but it is making itself a prisoner of its policy.

First, if monetary policy were to change course swiftly, rising interest rates would erode the profits of national central banks holding long-dated government bonds on their balance sheets. And even a gradual return to monetary policy normality meant that countries with particularly high levels of debt would soon hardly be able to service their debts.
Despite rising inflation and an accelerated exit from the low-interest mode by the US Federal Reserve, the ECB’s hands are tied. This is exactly what the European budget rules should actually prevent.

Draghi’s course as a role model?

These facts are no doubt also known to the governments in Paris, Madrid, Athens and above all in Rome. Mario Draghi has led an all-party coalition there with considerable success for almost a year. And it was Mario Draghi, who in 2012, as ECB President who had just taken office, saved the euro from collapsing with three magic words – “whatever it takes” – ended the era of the “European Bundesbank” and paved the way for a European transfer union . Draghi did not have a political mandate for this.

Almost a decade later, Draghi in Rome achieved within a few months what hardly anyone would have thought possible: he pushed back the populists and put Italy back on the growth path. “For the first time in many decades, Italy is in a position to completely realign its economy,” confirms Laurence Boone, chief economist at the OECD.

If Italy achieves the turnaround, the prime minister’s course could become a model for other troubled euro countries. It is true that the term “supply policy” has been burned out in many places. But if a country like Italy is successful with such an economic policy, it is likely to find many more imitators than if such measures are crammed through under the auspices of Brussels institutions.
Perhaps Draghi could then become the savior of the euro for the second time. It is to be hoped.
More: 20 years of the euro – at first it took some getting used to, today there is no alternative. A comment.

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