The EU never enforced its Growth and Stability Pact or the rules of the Maastricht Treaty. The crisis is approaching with France and Italy in the spotlight. The first casualty will be green politics. This printer Mish Talk.
France and Italy are major disasters right now because of the budget deficit rule. France has a budget deficit of 7 percent and Italy 5 percent.
France must reduce its deficit by a whopping 4 percent of GDP!
Neither Italy nor Greece should initially have been allowed in the EMU (European Monetary Union – Eurozone).
Greece has a debt to GDP ratio of 170 percent. The target is 60 percent.
On February 10, the EU agreed to loosen tax rules to cut debt, boost investment.
The latest renewal of two-decade-old rules known as the Stability and Growth Pact came after some EU countries racked up record debt as they ramped up spending to help their economies recover from the pandemic,and when the bloc announced ambitious green, industrial and defense targets.
The revised rules allow over-indebted countries to reduce their debt by an average of 1% per year if it exceeds 90% of gross domestic product (GDP), and by an average of 0.5% per year if the debt pile is between 60% and 90% % of GDP.
Countries with a deficit above 3% of GDP are required to halve this to 1.5% during periods of growth, creating a safety buffer for tough times ahead.
Defense spending will be taken into account when the commission assesses a country’s high deficit, a consideration triggered by Russia’s invasion of Ukraine. The new rules give countries seven years, up from four previously, to cut debt and deficits from 2025.
Note that the EU can adjust the enforcement, but not the actual goals of the Stability and Growth Pact without unanimous agreement and a new treaty.
With that background, let’s look ahead to the looming crisis as described by Eurointelligence.
We would like to alert our readers to a topic that has occupied us for some time – the possibility of a new financial crisis in Europe. We have generally been reticent to warn about financial crises. The main exception was the global financial crisis and its cousin, the eurozone sovereign debt crisis. Fifteen or so years later, we see another financial crisis ahead here in Europe: a crisis of the European social and political model with profound consequences for financial and financial stability.
The canary in the coal mine is the excessive budget deficits in France and Italy, of over 7% and over 5% respectively for 2024. These figures are a symptom, not a cause. Behind them lies a lack of economic growth which is necessary to maintain Europe’s social model. Germany’s fiscal policy could not be more different from France’s or Italy’s, and yet Germany is afflicted with exactly the same problem.
The European model was driven by oligopolistic industrial companies, which were heavily supported by the state through regulations that tilted the level playing field in their favor. The German car industry is a classic example, but everyone did this.
What is killing this model now is a shift in technology and geopolitical fragmentation. Of the two, we would argue that the first is the most important. More and more functions in our lives that were previously driven by purely mechanical processes are today fully or partially digitized. Barriers to entry have collapsed. China went from zero to the world leader in electric cars.
European companies no longer generate sufficient profits to drive the social model – and to finance long-term research. It is no surprise that Europe has very few technology companies. In short, Europe’s oligopolistic old-tech model no longer works in a digital world. We have reported on the EU’s attempts to prevent technological development through regulation. But this is a way of addressing symptoms, not causes.
We have a financial crisis ahead, caused by a combination of falling productivity growth and political crisis. Technology is the main reason for the decline.
Then comes Eurointelligence with their fads:
Geopolitics is what accelerated it. The solutions we have advocated over the years – a common fiscal policy capacity, a capital markets union, joint defense procurement to neutralize the increase in defense spending – are further away than ever. Unless one of these parameters changes, a financial crisis is a very plausible scenario.
But if they ride those fads ever so much, then they are right that this will not happen and that the financial crisis will come like an oncoming express train with no one in the cab.
In summary:
The EU countries cannot afford the militarization and the war in Ukraine. They cannot afford to destroy relations with Russia. Germany is no longer a locomotive that can drag the Union out of the quagmire. And the EU cannot afford “the green shift” and a crazy energy policy.
And they will naturally take Norway with them in the fall.
