The euro-zone’s crisis response is on the cusp of a second phase.
Phase One involves vigorous emergency budget-slashing and the bailing out of those stragglers whose efforts don’t convince debt markets that they’re worth lending to. This phase may not be over.
Phase Two hasn’t yet begun. It is to remake the euro-zone in Germany’s image.
At least, that’s what the Germans want, and the drama of this winter and spring will be how much of it they get. (It is not mere happenstance that Berlin has made dealing with Phase Two a condition for putting an end to Phase One.)
Germany has a wish list of tough new economic reforms it wants everyone else to undertake. None will be easy. Some—like the end of inflation-indexed wages–threaten to recast Europe’s social fabric and rewrite the relationship between the state, workers and employers. Heady stuff that’s hard to wrap up in a few closed-door meetings of technocrats and ministers in Brussels.
Take another idea, balanced-budget provisions. Germany has one, a so-called debt brake that comes into operation this year. Its rules are relatively simple: The federal government may run a “structural deficit”–the deficit excluding the effects of boom or recession–of no more than 0.35% of GDP; any deviations from that level are logged, and once the accumulated balance reaches a set level, new borrowing to fund the structural deficit is restricted.
The euro-zone already has budget-deficit rules, of course, but casting a fresh one in German law serves two aims: First, it moves the goalposts. The EU’s rules urge countries not to run budget deficits and limit them to 3% of GDP. But over the years, the limit has become the target and the target has become, well, anything. (Ireland ran a deficit over 30% of GDP last year, two-thirds of which went to finance bank bailouts.) The German debt brake sets a clear target.
Second, it ties politicians’ hands. If the brake is tripped, borrowing must slow or cease. (There is an exception for “extraordinary” circumstances.) The use of a structural deficit both permits extra spending in bad times and prevents politicians from using extra revenue to justify extra spending in good times.
This may work in Germany. But what about elsewhere?
The data show that the bulk of euro-zone countries would struggle mightily to match Germany’s fiscal restraint. Berlin is phasing in the structural-deficit requirement between this year and 2016. It’s at least close to its target. Using the European Commission’s procedure for calculating structural deficit, Germany is projected to report one of 1.4% of GDP next year.
The Netherlands, Finland and Luxembourg are the only other euro-zone countries expected to have a structural deficit below 2% next year. (Finland and Luxembourg should actually show small surpluses and would be the only countries to hit Germany’s 0.35% threshold in 2012.)
Greece? 4.7%. Spain? 4.8%. Portugal? 4.3%. Ireland? 8.9%.
Others could opt for a slightly higher figure than Germany’s 0.35%, or they could phase it in over a longer period. But it will be hard. Of the 17 euro-zone countries, only nine have ever, since the introduction of the common currency, met the 0.35% figure even once. (They are Germany, Estonia, Ireland, Spain, Cyprus, Luxembourg, the Netherlands, Austria and Finland.)
Notably absent from the list is France–the only triple-A-rated euro-zone country to run structural deficits persistently. Its last surplus, according to the commission data, was in 1980.
France’s Nicolas Sarkozy has voiced support for constitutional debt limits, and last year he proposed requiring the French government to set five-year deficit targets. Still, it’s a long way to a German debt brake.