• Christian Jasperneite

The end of sound fiscal policy.

(Reading time: 2 - 4 minutes)

A letter from... Christian Jasperneite;

The chief strategist von M.M. Warburg & Co. warns that dubious budgetary policies in Europe are taking the Central Bank hostage.

I can hardly believe it: In their book "Un président ne devrait pas dire ça..." two French journalists report on a secret agreement between France and the EU Commission. In essence, the point is that France officially adheres to the Stability Pact, but is not punished by the EU Commission if it misses the target. Präsident François Hollande is quoted as saying: "So we say: We make the treaty, we give three percent deficit as a target, but they know very well that we will not achieve that. They agreed to that." The book also provides the justification: "We are France, we protect you, we have an army, a capacity of deterrence. The Europeans ... they know they need us. And that has its price, which has to be paid."

I'd laugh if it wasn't for crying. This attitude shows that France (like many other countries) does not understand the deeper significance and economic sense of the Stability Pact. The pact stipulates that states in the euro zone should have a debt of less than 60 percent of the gross domestic product and must not exceed a current budget deficit of three percent. With nominal growth of five percent, these debt parameters are just about compatible with sustainable public financing.

The problem: Die The assumption of an annual nominal growth rate of five percent in the 1990s may still have seemed plausible. Heute it is completely unrealistic. A country like France is therefore likely to have a deficit of only about one percent in purely mathematical terms in order to make its national debt sustainable in the long term. France's actual budget deficit of 3.5 per cent in 2016 thus falls short not only of the formal target of the Stability Pact, but also of the economically relevant target to a dramatic extent.

The fact is that the French state has abandoned its goal of operating a sustainably financeable state budget with its current budget planning.

Under normal circumstances, this would be punished in the markets by price discounts on government bonds. However, this mechanism has been suspended because the European Central Bank has indirectly given a guarantee to prevent high yields on government bonds. As long as this remains the case, a state can refinance itself, even though its debt is in a dramatic imbalance.

This, however, takes the ECB hostage. Denn in the end, only its monetary policy decides whether states remain solvent or not. Originally, the Maastricht Treaty was drawn up precisely for this reason: States should be obliged to operate in such a way that the central bank does not find itself in such a situation. That's all over now. It would probably be more honest to abolish the contract completely than to act year after year as if one were sticking to it.

Ultimately, there is only one larger country in the euro zone that has put its debt on an almost sustainable financial path - Germany. Strangely enough, this is precisely what is criticized. The IMF and the World Bank accuse Germany of not doing enough to eliminate the existing imbalances im Außenhandel, which are partly due to the fact that the euro is too undervalued from a German perspective. Germany is expected to increase its debt and thus consume more in order to reduce its trade surpluses.

In the final analysis, the IMF and the World Bank are therefore demanding that we abandon the path of (just barely) sustainable public financing and follow in France's footsteps in fiscal policy. This, in turn, only works with the backing of the central bank, which must accompany fiscal interventionism benevolently so that it does not lead to disaster - which would mean that we would again be held hostage on the subject. The central banks are indeed prisoners of a global political current that is increasingly refraining from analysing long-term effects. You can't help but keep interest rates low in the future.