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The fiscal rules fight is open

Two countries, two different views on fiscal rules, one (France, with others) is for more flexibility and considers that the Maastricht Treaty rules are completely obsolete and others (Germany with Netherlands) consider that fiscal rules to respect are necessary in a monetary union without a fiscal union.

France has discovered that there is no limit to the fiscal deficit, countries can enjoy fiscal deficits of 9% of GDP without consequences (no inflation (?), no market panic) so why not continue? In addition, all (keynesian economists (to start with the FT, Ms. von der Leyen, OECD, IMF, etc.) advise that it will be a disaster to go back too quickly to a more balanced budget, it will be the beginning of the reduction of economic growth.

It is normal to have an artificial strong economic growth with the public expenditure off-loaded during this crisis; but this growth is short-lived and there will be a decline everywhere and we will listen all these “economists” telling us that if we have a decline in growth from 5% to 1.5%, this is because governments have withdrawn their spending injections too early. This is forgetting the hard facts: France average annual economic growth was not 6% as today but 1.4% a year (2010-19). If our countries are bouncing back so strongly, this is the result of an extraordinary fiscal impulse which cannot be repeated every year.

So lax countries as France don’t want to come back to “stupid rules” and bureaucrats at the national and European level are looking for new rules. Yesterday, it was proposed to exclude investment to calculate the fiscal deficit; today it is proposed to exclude “green” spending (whatever it is), tomorrow, the Italian and the Greeks will ask to exclude the cost of having an overburden of illegal immigrants, then the French will ask to exclude the military spending in the Sahel, etc. and you will notice a lot of green (do you have a clear statistical definition of what a green investment is?), tomorrow public investment in the budget will jump from 1% of GDP to 3, 4%.

The “economists” who argue for excluding some expenditure from total expenditure to calculate the fiscal deficit do not see that there is one deficit, not the one calculated by bureaucrats but the one which has to be financed by an increase of debt by the ECB today (monetary financing of deficits), tomorrow by the markets, perhaps the market will be reluctant to finance public debt well above 100% of GDP at 0.3-0.7% (at 10 years).

France cannot continue to have a public debt ratio amounting to 114% of GDP (2020) (Germany (69%), a public expenditure ratio (62% of GDP, the highest in the world) (Germany 51%), a fiscal deficit (10% of GDP), Germany (4%).

If one rule should be selected, this is not an artificial fiscal deficit but a reduction of public expenditure for the countries with the highest expenditure ratio.

French officials (and the keynesian economists) do not understand that the criteria to follow is not the fiscal balance (a difference) but the structural element of the deficit, public expenditure and a free-market economy cannot function with an expenditure ratio amounting to 60% of GDP without a slow decline.

Mr. Le Maire, the French Minister of Finance has wowed to cut total public debt next year. Well, Mr. Le Maire is very articulated and a bright debater, every year he promises to reduce “next” year public expenditure…

The expenditure bias in France is not a cyclical question, every year you have a good excuse to raise a “little bit” expenditure for legitimate reasons (crisis) or for cyclical reasons (not enough growth, too much unemployment, too many street demonstrations).

Sweden understood that there is a limit to the public expenditure binge in 1993 and reduced its expenditure ratio from 68% of GDP in 1993 to 50% over seven years. Why does France not follow this rule? This is a question of survival, a free-market economy cannot run on a sustainable basis with an expenditure ratio amounting to 56% of GDP.

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