A Crisis built on the Sands of Debt
You don’t have to travel to the other side of the world to find debt crises. A short hop and a Eurostar will neatly bring you to the heart of one much closer to home: the Euro.
The Single Currency was always a political project. It was part of the great scheme to unite the continent of Europe as a single construct, in its builders’ eyes destined to rival the superpowers of the future.
Others involved in the plan were more sanguine. The restoration of Germany to both financial stability and to democracy had been based on strong economic foundations. The memory of the hyperinflation of the 1920s remains a trauma to German politicians and economists even today, triggering as it did the instability that facilitated the rise of the Nazis. So it was utterly understandable that, while in order to prevent future wars seeking to meld the German state with those neighbours it had tended to invade, its elite also sought to maintain that financial stability in order to preserve its political moderation.
Things didn’t quite work out like that. The EU, after all, is a creature of muddle and compromise.
The Single Currency was set up as a consequence of the Treaty of Maastricht. Part of the deal was that states would only be allowed to join the new monetary arrangement if they fulfilled the Maastricht Criteria, which were judged tough enough to prevent the money from becoming tainted like old-time silver. These criteria were:
• An inflation rate that was no higher that 1.5% above the rate for the three EU countries with the lowest rate over the previous year
• A budget deficit running at under 3% of GDP
• A national debt not exceeding 60% of GDP
• Interest rates no more than 2% above the rate in the three EU countries with the lowest rates
• Exchange rates within set margins of fluctuation for two years, under the new Exchange Rate Mechanism.
Debt was the crunch issue, and countries manoeuvring to join were supposed to be kept a well-focused eye on under a specific procedure. Yet for the practitioners of European integration, the problem came with that 60% debt benchmark, which is plain and in black and white in the treaty. The text to the protocol on the excessive debt procedure reads:
"The reference values referred to in Article 104c(2) of this Treaty are:
- 3% for the ratio of the planned or actual government deficit to gross domestic product at market prices;
- 60% for the ratio of government debt to gross domestic product at market prices."
Expressly, the Maastricht Treaty did not say;
The reference values for what we think Eurozone economies should be running at are:
- roughly three or four percent deficit, depending on if we think the relevent prime minister is being generally a good egg and pro-European enough
- Wildly over 60%, so long as we can say the figure is coming down generally
But this is how it was treated. It happened this way because the treaty had included a clause that allowed the actual accession criteria to be set out at a later date, separately from the defined danger watch criteria. This allowed the terms of joining to be softened later on. Properly speaking, the Maastricht Criteria aren’t the Maastricht Criteria at all, but a Brussels backroom set of criteria.
Astonishingly, the history of the Maastricht agreement has in effect been subtly rewritten in retrospect. Commission documents claim today that it has always been enough for Eurozone applicants that they were cutting their debts, even if they massively surpassed the actual level of that country’s GDP (let alone 60%).
from "A Fate Worse Than Debt" by Lee Rotherham
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