IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
The European economy is under threat. But it is not by producing another treaty that it will be saved. In order to restore the trust required to produce economic progress, the states first must enforce the existing treaties, in particular the Maastricht rules on a 3 per cent deficit and a debt of 60 per cent of GDP. If you support this position, please send us a message by clicking on firstname.lastname@example.org
The intergovernmental treaty on the European Stability Mechanism already took this slippery slope some months ago by granting financial support to governments under certain conditions. Today the European Union would like to ratify the Stability Treaty, the coordination and governance within the Economic and Monetary Union to make governments commit to operating balanced or surplus budgets. While this is laudable, the result will be ineffective or even negative.
The Fiscal Compact (or TSCG) stipulates indeed that this rule will be considered as upheld if the signatory countries respect a structural deficit of 0.5 per cent of GDP at most, and automatic corrective mechanisms would be automatically triggered in case of overshooting. In fact, nobody really knows what the structural deficit is. It is possibly a balance the standard of which everyone chooses to his liking.
For evaluating this limit is likely to be complex and controversial. The structural balance is generally considered to be the public budget balance corrected by the effects of the business cycle. The structural balance is thus the hypothetical financial balance that would have been attained if the economy were growing at capacity. The idea is to identify a nil balance over the cycle, but it is not established that each cycle provides a neutral balance of its accumulated variations. Moreover, this definition supposes a potential GDP representing the supply that the economy is capable of sustaining over time without inflationist pressures. But the potential GDP is not directly measurable and is subject to various evaluations following international organizations and their respective methods.
Thus the Treaty offers no guarantee of a return to balanced budgets. Further, it does not even promise to be more respected than the Maastricht Treaty which was broken each time the member countries thought it compatible with their national interests. Already most states are looking to restore their budget balances through tax hikes, generally to no avail as they ignore the old rule that too many taxes kill taxes beyond a certain level. Unfortunately the TSCG will neither stop them nor discourage them to pursue this dead end.
The only way to get out of this crisis is by substantially cutting public spending, taxes and regulations combined with structural reforms to reducing the scope of government, thus creating more room for civil society and business, and solid growth perspectives.
If a new Treaty were to be considered, it should at most specify that the governments that do not stick to their commitments would be forced to leave. This would be a much stronger indication capable of restoring confidence.
Me Thierry Afschrift (Lawyer, Brussels), Mr Paul Beaumartin (business executive, France), Pr. Enrico Colombatto (University of Torino), Pr.Victoria Curzon Price (University of Geneva), Me Jean Philippe Delsol (Lawyer, France), Pr Jacques Garello (University of Aix-Marseille – France), Pr. Pierre Garello (University of Aix-Marseille – France), Mgr.Michel de Liechtenstein (business executive), Pr.Jiri Schwarz (University of Prague), Me Serge Tabery (Lawyer, Brussels), Nicolas Lecaussin (Director of development, IREF – Institut de Recherches Economiques et Fiscales).