Public Debt and Public Choice in the EU

~ Frederic Sautet ~

Noel Campbell over at Division of Labour points to an interesting WSJ article on EU budget rules and government behavior. EU rules require members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%. As any student of Public Choice economics would expect, this has led to all sorts of “exotic maneuvers” aimed at meeting the rules while in fact spending more than authorized. Governments’ deceitful actions range from off balance sheet budgeting to the use of currency swaps and other derivatives “to artificially massage cash flows and liabilities” in order to meet debt and deficit thresholds.

The EU imposes rules to its members within its euro-zone to maintain (somewhat) healthy fiscal positions. But the members also decide what the rules are and how they should be enforced. There is little or no third-party enforcement in place. This goes to show that the forces of public choice are very strong in European parliamentary systems because the incentive to spend now and pay later is magnified in social democracies. It is fair to say that EU fiscal rules are just a show that no one really takes seriously. If EU elected officials really wanted to impose fiscal discipline, they would have adopted fiscal rules that truly constrain government behavior, such as tax and expenditure limits as in Colorado's Taxpayers Bill of Rights. The Old-Time Fiscal Religion is long gone in Europe (and in the US for that matter). No one really sees permanent deficit spending as immoral (let alone economically tragic). The problem for EU social democrats is that the consequences of fiscal recklessness and government bad policies cannot be avoided and Greece is but the first country to hit the wall. Others will soon follow...

The irony is that private sector firms that have engaged in this type of behavior have been pilloried and their executives faced prison time. None of that will happen to government members and parliamentarians; that’s the privilege of making the rules and enforcing them.

Addendum (March 3rd):

Read another WSJ article on the same subject making similar points: "Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country's finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules."

Comments

[M.G. in Progress]

Any redress when EU members break EU own laws?
Let's say that some banks like to gamble... But again I would not blame bankers too much.

I would blame those governments and their officials who set up the scheme and regulation initially and those EU institutions that allowed them to do it. Particularly at EU institution level if you allow to be member of the club somebody who is cheating then you can only claim you did not know it was doing that.

Moreover what kind of redress the EU has in place when its members break its own laws? Nothing, no plans, you just have legal experts studying whether a bail out is possible according to laws that EU members have already broken.

[David]

Frederic made an interesting comment in passing: "The incentive to spend now and pay later is magnified in social democracies. "

He didn't back this up, presumably because it's supposed to be self-evident, but I don't find the logic behind this obvious.

Shouldn't the incentive to spend now and pay later, from a public choice perspective, be more of a demographics question in a democracy? If old people outnumber young, we'd expect them to vote in policies that buy lots of stuff now and gets paid for after they're dead, but if young outnumber old, we'd expect lots of fiscal responsibility because the young will eventually have to pay the tab.

Am I wrong?

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[Frank P]

These kind of rules are absolutely crucial to ensure the global credit crunch doesn't come around again. Unfortunately these trends do come around.. but could this be the last one ever? Lets hope so.

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