It’s the Denominator, Stupid!

This weekend’s news was the downgrade of the UK by Moody’s. Chancellor Osborne took this as a sign that austerity should be strengthened even more, probably because he had little choice (never put all your eggs in one basket…). And yet, if only somebody in Downing Street bothered going through the text, they would have read this:

The key interrelated drivers of today’s action are:
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

Thus, Moody’s analysts clearly state the direction of causality:

The “Golden” Rule. Really? Golden?

The European Council meeting, next Monday, should finally lift the veil of mystery  that has surrounded the new “fiscal compact”, the set of rules supposed to govern fiscal policy in EU member countries. As of now, the only official document in our hands is the  Statement approved by the Heads of State and Government at the December 9 meeting.
I have argued at length that I am not in the camp of those who believe fiscal profligacy is the source of EMU problems (recently, here and here). Rather the contrary, I always thought (see for example here and here) that even the current rules de facto prevented EMU countries  from effectively using the standard tools of macroeconomic policy.

A First Impression on the EU Summit

The Brussels EU Summit is extremely negative for the decisions that have been taken:

• We are going to converge towards a “German Europe”, based on fiscal austerity and on compression of domestic demand. The stubbornness in rejecting any role for active macroeconomic policies is scary, especially as we are still engulfed into a crisis that could have been substantially worse, were it not for the stimulus packages of 2009. Just ask a question: where would the EU be, if the rules Germany wants,  were already in place in 2008?
• The eurozone emerges from the Summit, once again, as the only major economy of the world that does not have a properly functioning central bank. With the support of ECB President Mario Draghi, it was once again made clear that the ECB should and would not act as a lender of last resort.

There will be time to discuss these issues, and to ask where does the EMU go (or does not go)  from here.

Here I want to underline the only positive aspect of the meeting: The (self) exclusion of the UK from the process of further integration. This is seen as dangerous by most commentators. I’d argue that it is the only good news that we got from the sleepless night in Bruxelles.
The European leaders could not afford to emerge from negotiations empty-handed, and this forced them to refuse the British vetoes. For the past 38 years the UK has been constantly pushing on the brakes of European integration, obtaining (should I use the term ‘blackmailing’?) compensations and opt-out clauses for every advance that it reluctantly allowed.
The looming Armageddon gave European leaders the strength to finally break free from this grip.

Europe is finally advancing towards increased cooperation. In the wrong direction, for the reasons recalled above, but it is advancing. It is to be hoped that last night we set a precedent, and that in the future the method of enhanced cooperation will become the norm each time that a country blocks the process for selfish reasons.
I made this point in an interview this morning.