Wait Before Toasting
Just a quick note on yesterday’s announcement by the Commission that virtuous countries will be able, in 2013 and 2014, to run deficits and to implement public investment projects.
Faced with an excessive enthusiasm, Commissioner Rehn quickly framed this new approach within very precise limits, that are worth transcribing:
The Commission will consider allowing temporary deviations from the structural deficit path towards the Medium-Term Objective (MTO) set in the country specific recommendations, or the MTO for Member States that have reached it, provided that:
(1) the economic growth of the Member State remains negative or well below its potential
(2) the deviation does not lead to a breach of the 3% of GDP deficit ceiling, and the public debt rule is respected; and
(3) the deviation is linked to the national expenditure on projects co-funded by the EU under the Structural and Cohesion policy, Trans-European Networks (TEN) and Connecting Europe Facility (CEF) with positive, direct and verifiable long-term budgetary effect.
This application of the provisions of the SGP concerning temporary deviations from the MTO or the adjustment path towards it is related to the current economic conditions of large negative output gap. Once these temporary conditions are no longer in place and the Member State is forecast to return to positive growth, thus approaching its potential, any deviation as the above must be compensated so that the time path towards the MTO is not affected.
For once, the Commission is not vague about what is allowed and what is not, and the result is that this announcement will turn out to be nothing more than a well conceived Public Relations operation. Allow me to attach some numbers to the Commission proposal.
So, how much extra public investment will be possible thanks to the “new” approach? I will assume that all 17 eurozone countries are “well below potential growth”. I will also overlook the fact that their expenditure needs to be in projects co-founded by the Commission (meaning that the money will most likely not be spent immediately). Finally, and this is the most heroic assumption, I will assume that the Commission’s estimates on GDP and deficit for the next two years are correct. As the forecasts are most likely too optimistic, and as I have put myself in the most favorable case, the calculation below is most probably an upper bound, and available resources will turn out to be much less.
And here is what the calculation gives. The first two columns give the distance from the 3% bar, and the last two columns give the corresponding amount in billions euros.
|Margin for Public Investment|
|In % of GDP||In Billions €|
|Total as % of GDP||0.91||1.06|
|My calculations on DG ECFIN AMECO Forecasts|
The table is self explanatory, and it needs just a few comments
- Of the 17 eurozone countries only 6 (!) are forecasted to have a deficit lower than 3% in 2013 and 2014. the total amount that could be spent (under the most rosy assumptions, let me remind it), is around 1% of GDP (slightly less in 2013, slightly more in 2014).
- Furthermore, the only country with a significant margin of manoeuvre is Germany, that most likely will not use it. With the exception of Italy, none of the countries in trouble will be able to profit from the “new policy stance”. And Italy is one of the two or three countries for which the Commission’s forecasts are without any doubt going to be revised downwards, so that their margin will vanish.
- As it is unlikely that Germany will use the fiscal space it has, available resources are peanuts. Without Germany,the total of available resources as a percent of GDP would be 0.126% and 0.29% of GDP in 2013 and 2014 respectively. Good luck with lifting the eurozone economy out of recession with that amount… And that, in the best-case scenario
Once again it is much ado about nothing. An announcement that will lead to nothing more than a few headlines for a couple of days. Its only usefulness is that the table allowed me to show, once again, that without a radical change in the fiscal stance of Germany, the eurozone will remain stuck in low-to-negative growth for the years to come.