Cutting Europe’s greenhouse-gas (GHG) emissions by 55 per cent by the end of the decade will cost more than 5 trillion euros ($5.6 trillion). Now, however, there is another: the need to make space for climate-related public investments. We have seen similar behaviors on the part of Europe’s fiscal policymakers.
Three per cent of GDP just happened to be the deficit consistent with keeping the debt ratio stable at 60 per cent, given prevailing interest rates and growth rates.ĭrivers obey traffic rules that make sense they disregard rules that are arbitrary and capricious. The figure of 60 per cent just happened to be the average debt-to-GDP ratio in 1992. The 60 per cent and 3 per cent reference values for debts and deficits lack any economic basis. But continuing to run surpluses for decades would be unprecedented for a modern economy - which is to say that no one expects it to happen.Īnd there is no good reason that it should. Thus, the Greek government is ostensibly required to run a budget surplus of 5 per cent of GDP, assuming the economy grows as fast as 2 per cent a year, which the International Monetary Fund deems unlikely. A rule added in 2011 requires governments to eliminate 5 per cent of the excess each year until the 60 per cent threshold is reached. Greek government debt is more than 200 per cent. Eurozone-wide government debt is 100 per cent of GDP.
In fact, post-COVID debt ratios have blown past the 60 per cent ceiling for government borrowing. So surely the prudent upper limit today is higher. Back then, 60 per cent of GDP was considered a prudent limit for how much debt a government could safely service, with annual budget deficits capped at 3 per cent of GDP. In 1992, rates on ten-year German government bunds averaged 8 per cent.
For starters, interest rates on public debt are only a fraction of what they were in 1992, when the EU’s fiscal rules were negotiated. Experts at the European Commission are considering how the EU’s fiscal rulebook should be revised and Germany’s new government has quietly signaled a willingness to consider changes - though any modifications there will most likely be limited, given disagreements within the coalition and control of the finance ministry by the fiscally conservative Free Democrats.Īrguments for reform are compelling. BERKELEY - The European Union is about to undergo a much-needed review of its fiscal status quo.
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