Is a 'Debt Brake' a good idea?

aftermn

I see that in recent reportage of the euro discussions in brussels there is much talk of a quid pro quo in which Germany will accept increases in the EFSF but only if there is an acceptance throughout the Euro area of their own constitutional restriction of the right of individual governments to run deficits.

A constitutional ban, if you like, on budget deficits of a certain level.

A restriction, certainly, on soveirngty, but maybe, given recent history, one we should embrace.

Any thoughts?

Permabear

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AlmightyCushion

aftermn wrote: »

I see that in recent reportage of the euro discussions in brussels there is much talk of a quid pro quo in which Germany will accept increases in the EFSF but only if there is an acceptance throughout the Euro area of their own constitutional restriction of the right of individual governments to run deficits.

A constitutional ban, if you like, on budget deficits of a certain level.

A restriction, certainly, on soveirngty, but maybe, given recent history, one we should embrace.

Any thoughts?

Even a couple of years ago before the recession hit, I'd agree that some sort of limit would be good. Depends how much of a limit we are talking about though as obviously there may be times when borrowing is necessary.

hinault

In principle I agree with the concept of Eurozone members being restricted from running budget deficits.

However in order to do this, Europe will need to have oversight of each member State's budget.
Would this be a good thing? In principle it would.

But.

The reality is that the economic/fiscal/commercial conditions which pertain in say, Bavaria or Lombardy or Navarra, are unique individually.
Therefore in order for this idea to work, the Eurozone would require deeper and wider integration.
How would these issues be resolved? I have no idea but I imagine it would require a huge amount of research and then vast wealth transfers in order for this concept to work.

Thorny issues like our current rate of corporation tax would almost certainly come in to play.

aftermn

The wider implications of an EU agreement on this are complex, I agree.

But just from our own perspective, and given our own experience, should we now amend our constitution to include a provision limiting any governments right to allowing debt to rise above a set limit.

Our own perspective being the banking bailout, the budget deficit etc. If we had such a constitutional provision perhaps the last government would have fallen sooner. Perhaps they would not have guaranteed the banks in the way they did. Perhaps we would have had an earlier reaction to the crises.

Questions in the Dail from the opposition is one thing, a Supreme Court chalenge is something ese entirely.

Permabear

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aftermn

Permabear wrote: »

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Agreed, but has it been enforced?

In fact were not Germany and France in contravention of this 'pact' before we were?

I think that constitutional provisions are much more restraining then 'pacts', certainly here in Ireland.

Maybe we could include in the constitutional provision a limiting of the pension rights of any government which breached the provision.

Permabear

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SkepticOne

aftermn wrote: »

Agreed, but has it been enforced?

In fact were not Germany and France in contravention of this 'pact' before we were?

And during that time Ireland was held up as an example of fiscal prudence by many (though not all).

We did not have a budget deficit but the problem was that our surplus was based on an unsustainable building and housing boom fuelled by cheap credit. When that boom inevitably bust, we were left with a substantial deficit.

Therefore we need a way of spotting unsustainable bubbles before they have developed. Unfortunately there is no hard and fast way of doing this. For every expert who claims there's a bubble there's another one who denies it. In Ireland the established view among experts was that there would be a soft landing. This view would have been shared by "prudent" German banks lending to Irish banks who in turn lent to property developers and speculators.

The key thing I would like to see implemented is some constitutional ban on socialising private speculative losses. If you borrowed, gambled and lost then that is between you and whoever you borrowed from. If you lent to someone who gambled and lost then you should have no right to compensation from the general public for your unwise lending decision.

The same goes for bond holders and foreign banks that lent to Irish banks. You lent unwisely to Irish banks and if you can't extract it from them you have no right to cripple the Irish economy generally in an attempt to get a return.

This is the sort of thing I would like to see happen. I realise that it is totally unrealistic politically. Instead we're being lent money with the condition that substantial sums be pumped into repaying private debts owed by failed businesses to banks in the core EU.

ardmacha

SkepticOne has hit the nail on the head. By conventional measures Ireland didn't have large borrowing, having one of the lowest debt to GDP rations and a current budget surplus with limited borrowing which was spent on roads the the like. Any simplistic rule, whether written into the constitution or elsewhere is largely useless. Ireland had an inappropriate budgetary approach given the financial conditions, but there as SkepticOne says there isn't a simple way of measuring this. Trying to make bailouts of the private sector illegal is not really feasible either. You need measures to moderate the booms in the first place.

The present EU initiative may have merit in that it proposes prudence, but simplistic measures to do this based on German conditions will do more harm than good. The core problem is the difference in conditions between the Germanys of the Euro with ageing populations and relatively slow growth and the periphery which should have faster growth. The question of how you moderate this growth is not a simple one, but only simplistic measure or analysis have been proposed.