En route to the recession
Some, understandably, have mostly chosen for the meeting of the Council of the European Union (EU) on 8 and 9 December the decision of British Prime Minister David Cameron, to veto a new treaty.
In fact, this choice has masked the failure of the leaders of the euro area to prescribe a remedy for the ills of credible monetary union. They just announced a turn of the screw against the deviant budget. This has perhaps reassured. But it will not work.
As their main decision is to strengthen fiscal discipline, that is to build what German Chancellor Angela Merkel and French President Nicolas Sarkozy called a "union of the Stability and Growth" - but would rather be in my opinion, a "union of instability and stagnation."
Even in the context of an intergovernmental treaty, observes Olli Rehn, European Commissioner for Economic and Monetary Affairs, this improved discipline could probably be implemented through the European institutions.
What are the main provisions of the Brussels agreement?
First, as stated by the heads of government of the euro area, "the government budgets are in balance or in surplus, this principle is considered met if, in general, the structural deficit year does not exceed 0.5% of gross domestic product (GDP) nominal. "
Second: "This rule will be introduced in national legal systems of member states (...) and will provide an automatic correction mechanism that will be triggered if a discrepancy."
We can already objected to these measures that are so severe that their application is unlikely. The Council underlines that indeed "measures and sanctions, proposed or recommended by the Commission, be adopted, unless the (country) in the euro area otherwise require a qualified majority."
A shot in the foot
So that, in general, no one is deliberately trying to shoot themselves in the foot. But imagine that this is the case. This would mean that from uncertain estimates of structural deficits, the Commission (composed of unelected bureaucrats) may impose sanctions on elected governments even when they are subjected to high pressures. What will the Commission if they refuse to bend? She will take control? The answer is yes. And this is a constitutional monstrosity.
And, as said Kevin O'Rourke, University of Oxford, is an economic monstrosity.
To show this, I will incorporate the analysis of balance of payments of balances to the private and public financial members of the euro area. Recall that by definition the sum of these balances must equal zero. But what is revealing is how they add up.
We know that before the crisis, fiscal imbalances were modest while those accounts were enormous. In some countries - notably Germany and the Netherlands - the excess private funds were collected by the financial system to finance private deficits in other countries - Greece, Ireland, Portugal and Spain .
When the crisis erupted, these flows are interrupted. The deficits of the private sectors have collapsed (most turning into surpluses) as explosions while budget deficits. Today hammers Germany, they must be resolved.
By definition, the sum of current account deficits and private deficits must also approach zero. The private sectors of capital-importing countries have previously turned to surplus for good reason: they try to reduce their debt, partly because their assets lose value. As the external deficit should it fall. This can happen for good or bad way.
The right way would be to increase the production of exportables and import substitutes, the bad would be to go through a deepening recession. The proper way would require a sharp increase in imports from the center of the euro area, or a better competitiveness of the area as a whole.
But given the predictable levels of demand and activity, there is unlikely to see the realization of one or the other. Remains the wrong way: strong recessions in which the government reduced its deficit by increasing deflation of the private sector.
In short, it is very difficult to eliminate budget deficits in countries with structural capital-importing without prolonged recessions or greater external competitiveness.
However, it is relative, so a better performance of foreign countries "weak" of the monetary union implies a deterioration of the capital-exporting countries of the euro area, an improvement of the area as a whole.
THE EURO AREA A MEGA-Germany
The first solution implies that Germany will do a lot less "German" and the second, that the euro area became a mega-Germany. Who can believe now that either is plausible?
The result remains by far the most likely, this orgy of fiscal austerity announced: recessions lasting structural in vulnerable countries.
To use language brutal, the single currency will become synonymous with lower salaries, debt deflation and prolonged economic downturn. Is this viable, regardless, moreover, the cost of a bursting of the euro area?
Instead, it persists in a pact of stability and growth failure is predictable and repeated (this column is published exclusively in partnership with the "Financial Times". © "FT". Translated by Gilles Berton).
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