History will say that the two criteria of the Maastricht Treaty were improvised by a group of economists during a long night and never seriously analyzed. While I have no problem with the indebtedness limit of 60 percent, since it is the result of a multi-year series of public finance imbalances, this is not the case for the budgetary limit.
Joseph and Pharaoh
One can argue about the adequacy of the 3-percent ratio, but the aberration of the Maastricht Treaty is in its annual nature. Economics 101 will teach any student that -- whether one likes Lord Maynard Keynes or not-- budgets can have a huge influence in countering cyclical evolutions. In other words, going back to the biblical analogy of Joseph and Pharaoh, during years of abundance, governments are supposed to save: that means, reduce their budget deficit and indebtedness. During years of economic slowdown, savings can be released or further indebtedness can be authorized to relaunch the economy.
By fixing annual budget deficits, Europe is shooting itself in the foot: while it does, of course, authorize lower budget deficits during good years, it makes it impossible to allow further budgetary deficits when the economy is in recession. Europe is in recession.
Blending budgetary austerity with economic growth.
It is perfectly clear that a good government must be capable of using both the accelerator and the break. It all depends when. Accelerating in turnarounds can be devastating and breaking in a straight line will not help winning the race.
It is an art. It is not just economic equations. It requires a truly capable doctor who has the pulse of the markets, the consumers, the investors and the private corporations. It is far from being impossible if... ideology were not there to confuse the signals and their analysis.
The European debate on austerity is absurd. and attacking Chancelor Merkel is inappropriate.
The attack of the French Socialist party on the German diktat in favor of austerity would not have attracted any interest if it were not emanating from the Socialist Party, currently in power. The French would love nothing more than proving that the German austerity failed. Unfortunately, Germany is better than ever, and it is President Sarkozy that provoked a higher and faster increase of public debt than Germany. In 2007, both countries had a 67 percent debt/GDP ratio. Germany is at 82 percent and France is now above 90 percent.
The new Italian Government of Enrico Letta announced that it will spend more for the poor without increasing its indebtedness, that is now well above $2.6 trillion and will soon reach 130 percent of GDP. The most fragile and indebted economy of Europe intends to lead a campaign against authority.
Allow 2 percent of deficit for productive investments.
In the spirit of countering the recession, I would argue that the EU should allow the countries in difficulty to spend a maximum of 2 percent a year for the next two years. That money should not be spent to grant social or other favors. It should be exclusively allocated to public productive investments that will give some wind in the sails of the European immobilized economy.
This would reconcile those who want growth with those who are favoring austerity. The latter
need to understand however, that the current treaties are strangling Europe with an absurd budgetary limit.
It is simply called responsible public management.