Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom


A new world

The world is probably going to change after the recent downgrading by Standard&Poor’s of the US debt rating from triple A to AA+. Beyond the disturbing loss of the landmark Treasuries represented for global finance, what is important here is the awareness that even the biggest world economy is not allowed anymore to do just anything with public spending. The message is clear. The current crisis is actually giving the opportunity to put the political genie back in the bottle. It is now time to grasp this chance, but will political decision makers have the will to do it?

Observing some of the political reactions, one could be skeptical. Many have criticized the intransigence of the representatives of American libertarians during the debate over the debt ceiling, while they actually have been the only politicians to act in a responsible way, refusing a compromise that endangers the future of their country. In the same vein, some politicians are flaying credit rating agencies. The US Department of the Treasury has violently criticized Standard & Poor’s decision. In Europe, several voices are pushing for a public credit rating agency, which will be undoubtedly easier to control by governments. Once again, politicians refuse reality! Of course, credit rating agencies are not simply a “thermometer”: they have often measured the temperature too late (subprime crisis) and they can generate the fever. However, after their past mistakes, they are now taking care of their image in order to stay in line with the demand of investors buying their services. Besides, if the impact of their assessments is so brutal, we have to blame the international regulations like Basel II (and III). It is more than ever necessary to think about alternative, competitive and diversified ways to take count of the risk in the balance sheets of the banks.

The old reflex of trying to “restore market confidence” is dying hard. Certainly, the desire to avoid another September 2008 is understandable. But should we continue with the old “Greenspan method”, subduing markets in the short run? Should we continue curing market bubbles with new bubbles? Financial markets are the reflection of reality, its messengers: if they lose confidence, it is a sign of the need of deeper change. And huge market corrections today are a sign of their disbelief in the effectiveness of the same old short term methods by monetary authorities.

Facing the debt issue, political decision makers seem to become aware of the emergency. They now pledge to adopt “golden rules” to guarantee balanced budgets. But didn’t we already have the Maastricht requirements about debt and deficits? Why have they not been honored? How could we therefore have the guarantee those new golden rules will be respected? And, above all, a balanced budget is not the crucial issue: the source of the current troubles to be dealt with in priority is reckless public spending. In order to do so, it is necessary to go back to the roots of democracy and tie the hands of government when it comes to spending.

Modern democracy has two pitfalls, namely the tyranny of the majority and lobbies, and technocratic elitism. The first consists in transforming democracy in an engine to redistribute “presents” beyond the real financial capacity of the nation, in order to satisfy the “people’s will” and the expectations of some social groups. In this context, the entanglement of political decision making levels and responsibilities in a multi-layered bureaucracy (of which France is probably the symbol) makes accountability impossible, and opens door to the escalation of excessive spending and the institutionalization of bad management of public funds.

The second pitfall is as dangerous. The Euro-crisis has showed the dangers of the technocratic centralization of decision making. While some hardliners, being treated as outcasts by the intelligentsia, have kept warning for fifteen years about the risks of a “constructivist” currency like the Euro, the failure of the EMU is reminding us that technocrats are neither innately wise nor omniscient and they do make mistakes. In sum, they are faillible human beings, just like anyone else. Except they impose their mistakes to everyone, and do not bear the consequences of their errors. Here, again, we have the problem of the lack of accountability. Today many voices in Europe talk about “federalism”, but in the sense of centralization – “let’s pool all debts together, let’s harmonize everything”. It cannot be too strongly stressed that this path must be avoided! Opposite to this kind of anti-democratic Leviathan, federalism should on the contrary allow local liberties and, above all, give a sense of responsibility and accountability to each level of public decisionmaking.

Going back to the roots of democracy means putting our public finances in order in a responsible way, as Canadians or Swedes did in the 90s: each level of local, regional and state administration should be evaluated and downsized if part of their spending is not serving the general interest. Some excessively generous “categorical rights” should be abolished. Going back to the roots of democracy means clarifying again the link between public spending and taxation, so that citizens know what they pay and what they get; putting an end to impenetrable and crossed public financing, to the lack of accountability, to financing current spending at the expense of future generations. The “new world” is an opportunity for a real democracy. Missing this opportunity means pursuing a crazy ride, at the growing expense of our purse and our liberty.

This article first appeared in French on www.unmondelibre.org ...

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