Mitchell, B. (2014) “The inexact science of calibrating fiscal policy“, Bill Mitchell Blog: Modern Monetary Theory … macroeconomic reality, 02 December.
In the showdown between France and the European Commission last week, France clearly is the winner on points, which is not surprising given the impossibility of the task the Commission had set it in meeting the Excessive Deficit Procedure (EDP) rules and the danger to the latter if France was to openly defy it. We have a sort of stand-off between the surrender monkeys – France is going along with the rules sort of and the Commission is bending the rules to save face. It is 2003 all over again. The public might actually think this EDP process is based on a fairly definite science with respect to measuring fiscal policy positions which provide unambiguous statements of deficits. The public would be very wrong if they did adopt that conclusion. In general, the applied work associated with informing the EDP process is very inexact. But, moreover, it is ideologically tainted which makes the process very damaging for any notion of prosperity. All applied work has measurement and other technical issues, which means it is always just an approximation. But when those errors are overlaid by a systematic bias against government net spending and therefore full employment, then the exercise becomes a scandal. To get started, the so-called – New Pact for Europe project released its second report – Towards a New Pact for Europe – last month (November 13, 2014).
On Page 27, you learn why the whole exercise will fail:
Measures to strengthen the social dimension of EMU by identifying and agreeing on binding common social convergence benchmarks/criteria matching the quality of the convergence criteria laid down in the Stability and Growth Pact or the fiscal criteria included in the Stability Treaty. Introducing such benchmarks within the framework of a social compact (if necessary via an intergovernmental treaty/agreement) would guarantee mini- mum social standards and guide EU spending priorities. To make the social dimension an integral part of economic and fiscal governance, these criteria could also be used as the basis for mechanisms to trigger preventive and corrective actions if social indicator targets are not met (‘excessive social imbalances’), similar to the excessive deficit procedure in the Stability and Growth Pact.
Are they kidding? The convergence criteria laid down in the Stability and Growth Pact were farcical, biased to stagnation, caused unemployment to be unnecessarily high, and were violated by most (if not all) the nations in the lead up to Stage III of the monetary union.
Relevant posts:
- Emmanouilidis, Α. J. & Davis, J. (Ed.) New Pact for Europe: Second Report – Towards a New Pact for Europe, A publication of the King Baudouin Foundation, the Bertelsmann Stiftung and the European Policy Centre (EPC), October 2014.
- European Policy Centre (2014) “Challenges and New Beginnings: Priorities for the EU’s New Leadership, Challenge Europe, Issue 22, September.
- Derviş, Κ. & Saraceno, F. (2014) “An Investment New Deal for Europe“, Brookings Blog, 03 September.