'Pure Symbolism' The Great Debt-Brake Swindle
Germany and France want all the euro-zone countries to enact balanced-budget amendments. While that might sound sweet to Angela Merkel's conservative coalition, the plan is triggering massive resistance in southern euro-zone countries. Even if they get their bombshell wish, it could ultimately be a dud.
German Chancellor Angela Merkel calls it a "debt brake" in dry, technical terms. French President Nicolas Sarkozy raves about the "golden rule" of a balanced budget. As they announced on Tuesday, the two leaders want all of the 17 countries in the euro zone to enshrine binding balanced-budget clauses into their constitutions by mid-2012.
Obligatory applause came from Brussels. Debt brakes would strongly commit politicians to making public finances sustainable over the long term, said European Commission President José Manuel Barroso and EU Economic and Monetary Affairs Commissioner Olli Rehn.
But the reactions to the German-French proposal among EU member states were much more reserved. Of course, most of them weren't as over-the-top as the one found in Britain's Daily Mail, which ranted about a "Fourth Reich" and commented that Germany was once again subduing the Continent -- this time under the pretext of debt brakes.
Still, it will be a tough battle to get all of the euro-zone countries' parliaments to adopt balanced-budget amendments. In France, the Socialist opposition has already signalled its resistance. Martine Aubry, a presidential candidate for the Socialist Party, calls the proposal a "propagandistic smoke grenade" and "a vague rule that doesn't really regulate anything." François Hollande, a rival candidate within the party, warns that the debt brake is "maybe a trap."
Indeed, Sarkozy plans to make the Socialists look like fools in the presidential campaign. To pass an amendment to France's constitution, he will need some opposition votes to obtain the necessary two-thirds majority. "If the Socialists vote for the 'golden rule,' we will look like Sarkozy supporters," says Manuel Valls, yet another presidential hopeful for the Socialists. "If we vote against it, we will seem dangerously irresponsible." As economic expert Christophe Borgel put it in the French news magazine Marianne, the real issue for Sarkozy is "juxtaposing a left of spendthrifts with a right of good administrators."
Too Tough for Spain and Italy ?
The amendment's chances of success in Spain are equally uncertain. As the daily El Pais sees it, the debt brake is the "most controversial proposal" to come out of the summit Merkel and Sarkozy held in Paris earlier this week. The paper also predicts that battles over whether to adopt the amendments could drag on in the parliaments of euro-zone states. The issue is complicated even more in Spain given upcoming elections in November. If the past is anything to go by, such issues can paralyze a parliament for months.
Given these circumstances, Merkel and Sarkozy's goal of having debt brakes enshrined in national constitutions by mid-2012 seems rather ambitious. Nevertheless, Guntram Wolff, deputy director of the Brussels-based economic think tank Bruegel, thinks the message itself is already important and that just having a discussion on the behaviour of heavily indebted countries like France and Italy has already made a noticeable difference. What's more, he believes that having nationally anchored debt brakes will have a "disciplining effect" in budget debates at the national level.
Indeed, the Berlusconi government has already announced that anchoring a debt brake in Italy's constitution is part of the country's most recent cost-cutting plan. Still, there is some question over just how serious the Italians will be about remaining true to the letter of the law. Indeed, the amendment would have major effects on Italy and force its entire political culture to radically change. As one commentator in the daily La Repubblica put it: "The proposed implementation of the balance budget 'golden rule' would be tantamount to a brutal detox for many of the chronic deficit offenders in the euro zone."
Merkel and Sarkozy are betting that pressure from the financial markets will be able to eliminate political resistance by mid-2012. But even if debt brakes find their way into state constitutions, they might quickly prove to be dull weapons. Indeed, economists point out that the astronomically high levels of state debt in many euro-zone countries would make having a debt brake completely meaningless. "Under current conditions, the debt brake is pure symbolism," says Thomas Straubhaar, director of the Hamburg Institute of International Economics (HWWI). "Debts have a momentum of their own. Their size makes it impossible to decree them away with political announcements."
Indeed, the IMF estimates that, even with severe belt-tightening, Italy's debts will still amount to 110 percent of GDP in 2016. At that time, it also predicts that Spain and France will continue to have a debt level of about 60 percent of GDP, the upper limit set by the Stability and Growth Pact.
For this reason, Straubhaar views Merkel and Sarkozy's call for euro-zone countries to present a plan by the end of 2011 for how they will push their state-debt level under the 60 percent mark as complete eyewash. "The governments will present their plans," he says, "but none of them will stick to it." He also points out that the Maastricht Treaty already dictated that euro-zone countries maintain balanced budgets and that the first to violate these stipulations were Germany and France. "Countries will always invoke extraordinary circumstances to take on more debt," he says.