Fiscal Sanity: Has Europe Taken The Lead Over The United States?


Something very strange happened recently in Europe. Amid all the by-now too common virtue signaling, fantasies about quick environmental possibilities, and quaint faiths in “soft power,” European Union (EU) leaders have seriously considered the need for a path back to fiscal sanity. Although the legacy of Covid and the demands of the fighting in Ukraine have kept government spending high, these leaders have acknowledged a need for deficit reduction and the desirability of keeping debt levels within reasonable bounds, steps that neither Congress in Washington nor the White House have yet even to consider. What might be still more surprising, the Europeans seem to have embraced the supply-side notion that not all government spending is equally useful to the long-term strength of their economies.

This remarkable news emerges from a recent meeting of economics and finance ministers from the 27 EU member states. These leaders agreed to alter rules first established in the 1993 Maastricht Treaty. Those rules insisted that no member state could sustain budget deficits in excess of 3% or that nation’s gross domestic product (GDP) or allow each member’s government debt outstanding grow to over 60% of GDP. Reality often forced nations to break these rules, so frequently in fact that politicians head come to ignore them. This recent meeting has attempted to bow to realistic practicalities and by doing so rejuvenate attention to the fiscal sense behind those fiscal guidelines. According to the European Council’s summary of the deal, the proposed standard now reaffirms the 3% rule for budget deficits but encourages politicians to take it seriously by also acknowledging the difficulties of adhering to the rule during emergencies and economic hard times and allowing a reasonable time for each nation to recover from urgent needs and recapture it.

Still more remarkable, the deal arrived at by these EU ministers makes leeway for spending not only for emergencies but also on things, such as infrastructure, that enhance an economy’s long-term capabilities. The aim is to relieve nations of the need to raise taxes, for instance, and possibly impair long-term economic interests just to adhere to the EU’s numerical targets. This sort of supply-side thinking is rare in EU circles and has all but gone out of favor in Washington.

This more flexible and practical approach will not go into effect until approved by the European Parliament and even then, not until 2025. The stated goal is for nations to fall into compliance by 2027. It may well take longer than this to bring the EU as a whole back into line. Although forecasts for next year — perhaps overly optimistic — put the average budget deficit in the EU at 2.7% of GDP, deficits presently, because of the legacy of covid and the need for economic stimulus in much of the region as well as defense spending demands brought on by the fighting in Ukraine, are well above the targeted 3% of GDP. Public debt levels stand at about 88% of GDP, far above the target of 60%. Still, the ministers express the at least implicit hope that the rules, stated now in a new and more practical framework, will set a standard and a direction for policy that for some time now has been largely ignored.

Unless, the European Parliament rejects the deal or governments again begin to ignore the rules, this agreement takes Europe a big step ahead of the United States. According to the latest U.S. budget documents, this country looks for budget deficits over 6% of GDP for the next three years and presently has outstanding public debt equal to 127% of GDP, some 39 percentage points above the EU average. Meanwhile, no one in the White House even talks seriously about limiting deficits or debt levels and very few in Congress do so.

One can only hope that the next Congress or the next president, whoever he or she is, will take this matter as seriously as the Europeans seem to have done. No one reasonably can expect each of the 27 members of the EU to abide completely by these rules. Things political-economic always exhibit considerable slippage. But at least the Europeans now have guiderails that the United States completely lacks.

Follow me on Twitter





This article was originally published by a www.forbes.com . Read the Original article here. .