EU Deficits Improve – But Spain and France Miss Targets

The austerity medicine – while not doing anything to stop the cumulative debtberg from growing – has at least lowered EU-wide budget deficits to 3.7% of GDP in 2012 from 4.2% in 2011. However, to no-one's particular surprise, both France and Spain have produced higher deficits than this average, and both missed their 2012 'fiscal compact' targets, by producing deficits of 4.8% and 7.1% of GDP respectively (they will miss again this year, perhaps to an even greater extent). They will be relieved to hear of the growing mood change at the center of the eurocracy in Brussels, as many prominent EU spokesmen there seem no longer very supportive of the tough German line.

A recent Reuters report on the situation suggests as much:



Budget cuts are at the center of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have no little hope of finding a job.

Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing something of a rethink, with the focus shifting to economic growth strategies. Both Spain and France are expected to get more time to reach EU-mandated targets of 3 percent.

"We need to combine the indispensable correction in public finances, huge deficits, huge public debt… with proper measures for growth," the European Commission's President Jose Manuel Barroso said in a speech in Brussels just before Eurostat released its data.

EU leaders are desperate for economic growth as the euro zone struggles through its second consecutive year of recession, and some officials say they will back off from the spending cuts blamed for deepening Europe's economic downturn.

The Commission will decide on May 29 whether to recommend to EU finance ministers to give Paris and Madrid until 2015 to cut its fiscal gap to 3 percent of GDP, today targeted for 2014.

It is not yet clear how big a policy shift EU policymakers are planning. EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in Washington on Thursday that financial leaders from the group of 20 economies calling for less austerity were "preaching to the converted."

Rehn says he is willing to grant more flexibility on fiscal targets to try to increase economic growth and is looking increasingly at countries' fiscal efforts in structural terms, which means removing the effects of the business cycle and one-off measures on the budget.

Germany and the European Central Bank still want to see the euro zone put its finances in order after a decade of borrowing that saw countries' debt and deficit levels rise dramatically. In addition, the EU's Fiscal Compact treaty signed by all EU countries, except Britain and the Czech Republic, in March 2012 requires governments to keep the budget in balance or surplus with a structural deficit no higher than 0.5 pct of GDP.

"I can't see there's been a big change and that austerity is off the table," said Jurgen Michels, a senior economist at Citigroup in London. "Most countries will have to come out with additional, substantial fiscal measures in order to meet their new targets," he said.”


(emphasis added)

It is increasingly evident that the differences between Germany and France as well as the various nations in crisis that were temporarily papered over last year are once again coming to the fore. Neither Germany nor the ECB are likely to change their tune, but the tune of the professional eurocrats in Brussels is definitely a slightly different one now.

As to the fiscal compact – can you say pipe dream? Budgets in balance with structural deficits not exceeding 0.5% of GDP? As we have pointed out when these agreements were originally announced, they are a lot tougher than the Maastricht treaty criteria – and as we all know, the Maastricht limits were already violated before the ink had even dried on the treaty. One of the first offenders was incidentally none other than Germany, a deed that went unpunished and consequently encouraged others to no longer take the limits seriously. This would undoubtedly still be the case if not for financial markets  putting massive pressure on euro-land governments.


Growth to be Created by Bureaucratic Magic Wand?

The other point worth commenting on is Barroso's remark about wanting to introduce 'proper measures for growth'. We wonder what such measures might consist of in the imagination of a professional politician-bureaucrat like Mr. Barroso (who is an ex-communist to boot). If we read the recent comments by people like French finance minister Moscovici (see also yesterday's missive on the G-20 shrimpfest) and monetary affairs commissar Rehn correctly, there seems to be a pervasive belief that 'growth' is the result of deficit spending and various government interventions in the markets. We have yet to hear even one of them say anything about cutting red tape and taxes. On the contrary, the downtrodden citizens of the EU are burdened by ever more of both.

So apparently Europe is supposed to produce 'growth' by means of central economic planning measures, while the jungle of regulations becomes thicker and thicker and ever more new taxes are invented every year (the imagination of euro-land politicians in this specific regard is absolutely boundless; soon they will begin to tax breathing). We can't wait to see how that trick is going to be pulled off.

In fact, nearly every major new measure introduced in recent years is certain to retard economic growth, not revive it. We have already discussed Hollande's 'Zwangswirtschaft' in France extensively (see also here, here and here), which has led to France becoming one of the weakest economies in the euro area (and one that continues to harbor the potential to blow the euro project up). A recent example of collective insanity at the top is the introduction of the 'Tobin tax', which is already proving a huge flop in France as Ambrose Evans-Pritchard reports ( as just about everyone with an ounce of common sense expected).



It looks more and more like the fiscal compact will fail well before the first euro area nation actually meets its ultimate targets. After ten months of relative calm in the credit markets it appears as though austerity may be chucked. No-one in the eurocracy has as of yet properly diagnosed the true causes of the boom-bust cycle in Europe, and so a repeat performance at some point down the road seems inevitable. A few nations already look economically damaged beyond repair, and these are precisely the nations that cannot veer from 'austerity' too much, because their governments have simply run out of funds or rather, funding options, to be able to embark on deficit spending sprees. Meanwhile, we doubt that the EU's bureaucrats have even the foggiest idea about what is actually required to set genuine economic growth and wealth creation into motion.





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