Varoufakis told us yesterday (see here) that he tabled a radical proposal for a legislated debt brake mechanism that, triggered by an independent fiscal council, would automatically reduce all state outlays by the degree necessary to set the state back on course toward some pre-agreed primary target.
This proposal is another shock in this increasingly surreal ‘negotiation’ between Greece and its creditors. The reason why this is so weird is because it is a ‘Merkozy’ proposal from an earlier stage of the crisis! Germany and France proposed in 2011 the introduction of debt-limitation rules in national constitutions to deal with the problem of state indebtedness in the Eurozone. Countries would be forced to amend their constitutions to forbid public deficits exceeding a certain percentage of GDP, similar to Germany’s “debt break” (Schuldenbremse), which would limit any new borrowing to 0.35 percent of GDP from 2016. France had said that it would introduce its own debt break, a constitutional balanced budget amendment Paris is describing as a “golden rule.”
Progressive lawyers resisted this proposal at the time as a regressive orthodox measure that aims to bind the state into a ‘neoliberal’ view of spending and to effectively outlaw demand side interventions in the economy (see here on the ‘constitutionalisation’ of economic reforms). This now coming back as a proposal from the supposedly ‘almost Marxist’ Varoufakis is… well, surreal. Read below for a short summary on ideas that were banded about in 2010-11 on European fiscal discipline reforms.
How can the EU in general and the Eurozone in particular overcome the current calamity? One possibility (and a very orthodox one at that) is for the EU to continue to rely on a mix of the preventive arm of the Stability and Growth Pact (SGP) together with financial market pressure to discipline states. This pressure, is assumed, would encourage populations to demand of their governments that they enforce domestic fiscal institutions that promote sound finances. For this to work, a ‘no-bailout’ clause must be credible and, where necessary, enforced. EU decision makers originally aimed in this direction, but without instituting the necessary conditions to make it work. It is clear that after the OMT operations of the ECB and the institution of QE, the no-bailout clause is not longer as strong as it used to be, despite proclamations to the contrary.
An alternative scenario involves more institutionalization and arises when a ‘no-bailout’ pledge is not credible. In federations where this situation is common, there are examples where institutional structures can still encourage sound fiscal outcomes. The country that may provide the best model for the EU under this scenario is Brazil. After a crisis in 1999 that arose in part because the central government bailed out state governments, the country introduced a comprehensive fiscal responsibility law. Under such a framework states negotiate their budget caps with the central government. If state governments do not abide by the caps, they lose important fiscal transfers from the national government. The framework includes what amounts to an independent fiscal council in each state that monitors what the state government is doing. Earlier plans floated to reform the EU fiscal framework share some, but not all, of these characteristics. This option involves greater political integration. It could solve the same problem, but it requires more political integration and a new EU Treaty.
The “Schuldenbremse” Debt-Brake is a very neoliberal way to achieve fiscal discipline in the Eurozone.