Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
god-fucking damnit.  Don't these idiots understand anything?

Automatic sanctions for a state that passes the 3% of GDP limit on the budget deficit.

This requirement establishes a structural bias for a Positive Feedback Loop in the Negative Direction for all eurozone governments during economic downturns and prevents government counter-cycle fiscal and monetary policy.  

A recession, by definition, is a reduction in GDP.  

Under the requirement as the tax receipts of a national government falls the amount of money the government can spend must also fall since:

  1.  The debt load (principal roll-over and interest payments) commands a larger percentage share of tax received

  2.  No new debt can be assumed

The result in a further decease in micro-economic activity since, again by definition, during a recession Private economic activity is decreasing.  So: during a time of decreasing economic activity the economy is hit by a double whammy: the private sphere doesn't increase economic activity and the public sphere can't.

The next step, as we have seen in Greece, is private capital begins to flee the national economy, looking for a "safe haven," further shrinking the available pool of capital needed to fund fund economic activity.  This lowers tax receipts yet again, increasing the percentage of government monies needed for debt payments ...

And round and round we go.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Dec 18th, 2011 at 01:30:34 PM EST
This you describe is the deflationary cycle that perdured in the US between 1930 and 1934, during the fisherman's term. By some reason elected leaders think this can't happen today. There are certainly huge differences from then to now, a modern currency system, "free" international trade, high economic inter-dependence. Problem is: the deflationary pressure can mount to such extremes that may destroy all these features. I hope it will never come to that.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Sun Dec 18th, 2011 at 02:41:16 PM EST
[ Parent ]
Precisely. The only substantial flaw with the cap on the structural deficit is the fact that they will almost certainly define the full employment point in a NAIRU sense and so will massively understate the structural GDP at "full employment" by massively understating what full employment really is.

But the only way to square the 3% structural plus cyclical deficit cap at the sub-sovereign level is for some system of providing grants from the economic sovereign level to the sub-sovereign level, eg, the EU issues grants to the members in proportion to population equal to 25% of the excess of the EU wide output gap over 5% of EU GDP.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 19th, 2011 at 02:22:38 PM EST
[ Parent ]


Top Diaries

Occasional Series