A realistic assessment of the EU wide stimulus package is at 0,9% of GDP, substantially below what the US Congress has recently approved, at 2% of US GDP. In this context, Jean Pisani-Ferry warns against Member States relying on their neighbours‘ stimulus packages to boost their own economy. But he also observes that government promises are not credible and, in spite of the arsenal of criteria and procedures of the so-called Stability Pact, European surveillance is no more credible. So it is up to each Member State to fix budgetary discipline and invest in institutions guaranteeing its well being. And the sooner, the better for everyone.
Three to four percentage points of GDP expected in 2009 in Germany, five to six percent in France, around 12 percent in the US. Everywhere deficits are ballooning and the level of concern rising. The recovery has scarcely begun but are we already to prepare for a period of belt‐tightening?
It would be a big mistake. The lastest data on the business cycle point to a European contraction equally swift and sharp as in the US, where Congress has just adopted a huge recovery plan set to inject the equivalent of two percentage points of GDP into the economy in 2009. But the European effort is much more timid. The Commission has calculated the European stimulus at between three and four percentage points of GDP. But it only arrives at this figure by topping up the fiscal boost with government and quasi‐government loans ‐ which merely replace the shortfall in private credit – and with the action of the automatic stabilisers (ie the fact that no action entails a bigger deficit on account of reduced revenue). While it is clearly a good thing to allow the stabilisers to do their job, they only serve to cushion the shock, not to stimulate. A realistic assessment of the budgetary spend in 2009 would be 0.9 percent points of GDP. This is obviously inadequate, especially as the infrastructure investments that many countries have opted for will only be carried out over time. In Germany, for example, the bulk of the spending will not occur before summer 2009.
The contrast in approach on either side of the Atlantic is not attributable to the respective fiscal positions: government debt is virtually at the same level in the two cases. It is primarily a result of European fragmentation. This means, first, that each country secretly hopes that its neighbours will stimulate for it (as an Irish minister candidly put it: ‘the best stimulus is that of our commercial partners.
It stimulates our exports but costs us nothing’). Fragmentation is also exposing those countries whose public finances are the most shaky under market pressure. Greece and now Ireland are having to pay a premium to borrow. Italy seems so strapped that it has not taken any recovery measure worthy of the name. This combination of wait‐and‐see and apprehension explains why Germany, which could but won’t and Italy, which would but can’t, are doing nothing more to support economic activity.
To exit this stalemate all countries should be participating in the stimulus, and it should be up to the most indebted and the weakest to commit, in return, to take drastic belt‐tightening measures once growth resumes. The correct fiscal policy at the moment is neither to put the brakes on nor to freewheel but to spend solidly today (or reduce taxes) in order to boost the economy and, at the same time, commit just as seriously to saving tomorrow. Contrary to what the advocates of permanent deficit and the ayatollahs of never‐ending rigour would have us believe, immediate stimulus and future discipline thus go entirely hand‐in‐hand.
The problem is that government promises are not credible and, in spite of the arsenal of criteria and procedures of the so‐called Stability Pact, European surveillance is no more credible. Every French government has for ten years gone through the motions of committing vis‐à‐vis its partners to a timetable for returning to balance, and its partners have gone through the motions of believing it. In Greece it is not the future which has been seen through rose‐tinted spectacles but the past. As for Italy, it has been uniquely creative in its accounting. In short, techniques have varied but the fact remains that, over the last ten years, no country has been seriously threatened with sanctions. The result is that markets look upon the Stability Pact as a paper tiger.
If Europeans were really serious, they would agree without delay on a recast of the Stability Pact which would provide more breathing space in the short term but at the same time keep a tighter mid‐term rein on government debt. Alas, this is not the likeliest scenario. This being the case, it is up to each country to set its own rules on fiscal discipline and to invest in institutions and tools which can guarantee that they are respected. The faster this is done, the better equipped we will be to confront an economic situation which is getting worse by the day.