Good morning,
Reporters of a certain vintage will remember the dog days of the eurozone debt crisis. I had a ringside seat as a (very) minor player in the policy response before jumping over the ropes into journalism.
When Greece revealed the scale of its budget deficit and made clear that it could not service its debts I was advising an MEP on the parliament’s economics committee. What followed was several years of emergency lawmaking; first as the EU haggled over creating a bailout fund that would provide multi-billion euro loans to Greece and, in time, to Ireland, Cyprus, Portugal and Spain.
Then came the process of re-writing the EU’s economic governance rules to step up surveillance of national budgets by the EU Commission. My then-boss was a shadow rapporteur on a handful of the files.
Making law in the midst of a crisis is not to be recommended.
Many politicians, particularly conservatives and liberals, wanted to please the bond market and to punish Greece and other countries, mainly southern European, who had got into debt distress. No matter that the banking crisis of 2008-9 was the root cause for much of the debt crisis in Europe and that French, German and Benelux banks had got up to their necks in bad debt.
During the course of the negotiations on the economic governance laws, it became clear that Angela Merkel’s government in Berlin — not the commission — was calling the shots. I remember amendments by liberal MEPs demanding that countries be fined 0.5 percent of GDP for breaching the debt and deficit rules. The economic absurdity of imposing such a massive fine on a country already in a deep recession hardly mattered — this was sado-austerity. Punishment had to be seen to be meted out to profligate countries.
More than a decade on, no country has been fined for breaching the SGP rules. On Thursday, the EU Commission proposed to slash the maximum possible fine to 0.05 percent, as part of a package of administrative reforms to the rules. This also includes reducing some of the reporting demands.
The stability and growth pact has always been something of a 'Child of Frankenstein'. There’s no science behind the 60 percent debt and three percent deficit ceilings and almost all EU countries have broken one or both of them over the past few years. Ultimately, what matters are not arbitrary targets but whether the markets think you can service your debts. That explains why the average debt burden across the G7 is 111 percent, about 40 percent higher than across Africa, for example, but the G7 countries face far lower interest rates, even Japan, whose debt burden of over 250 percent of GDP makes Greece and Italy look like exemplars of Germanic fiscal discipline.
Austerity machismo has — thankfully — been consigned to history. But the SGP is still influenced by the state of politics. The rules have been loosened to allow Covid-era spending and now defence. The bond markets haven’t panicked. Proof, perhaps, of the massive over-reaction in 2012.
- Benjamin Fox, Africa editor
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