Enforcing the SGP? No the EU should better abandon it
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There is this widespread belief that the EU should be more determined in enforcing the Stability and Growth Pact (SGP), so as to prevent states from behaving in a fiscally irresponsible way. This is established upon the perception that the root of the current crisis is the maladministration of certain irresponsible and corrupt governments of the “PIIGS”, whose political lifestyle is characterized by high inflation, large budget deficits and immense public debts. There is a certain truth in this explanatory format of the current crisis, yet it neglects a couple of things: The structural flaws of the euro and the systemic, triple crisis of the EU, which are the real roots of the crisis.
The idea that states should be very responsible with their finances is absolutely correct. Moreover corruption and lack of discipline of national governments should be combated from the lowest to the highest level. No one objects that. However the SGP in conjunction with the entire structure of the Monetary Union, is problematic and in itself causes this “indiscipline” in all states of the European Periphery.
The single currency, combined with the Stability and Growth Pact on one hand imposes a rigid monetary policy while on the other hand it lacks a Fiscal Union that would redistribute surpluses (fiscal transfers) thus minimizing/alleviating asymmetric shocks in the euro zone. A Monetary Union comprised of states with different structures in their economies, with different capacities and with different levels of competitiveness can only lead to divergence rather than convergence. It can only increase the existing gaps rather than bridge them.
This current structure, with all its omissions and all its policies, is nothing more than a “straitjacket” as Nobel Laureate Paul Krugman correctly pointed out back in March 27, 2011 in his NY Times blog:
Specifically, the reason Greece (and Ireland, and Portugal, and to some extent Spain) are in so much trouble is that by adopting the euro they’ve left themselves with no good way out of the aftereffects of the pre-2008 bubble. To regain competitiveness, they need massive deflation; but that deflation, in addition to involving an extended period of very high unemployment, worsens the real burden of their outstanding debt. Countries that still have their own currencies don’t face the same problems.</p>
While another expert, Marshall Auerback, accurately points out in his Credit Writedowns article (July 21, 2011):
It is also now obvious that countries such as Greece, Spain, Italy, Ireland and Portugal are struggling to compete with the much more productive German economy. In a currency union they cannot devalue their way out of trouble. The only alternative solution on offer is a long and painful period of austerity to reduce their costs through cuts in wages and living standards, the so-called “internal devaluation” — in reality, a one-off coordinated reduction of wages and prices across the board. It is, as I have argued before, more like an “infernal devaluation.” It amounts to a domestic income deflation — as wages are crushed — in order to get the prices of tradable goods down enough so the current account balance increases sufficiently enough to carry the next wave of growth.</p>
Within this context the euro is not a viable currency for all its members. Since a long period of austerity cannot lead to economic growth, but only to the destruction of the socio-economic order of the state. Prolonged austerity in search for “competitiveness” is like voluntary slavery. Austerity in search for growth is a fallacy.
The key in competitiveness is not less spending. It is more efficient spending. It is not the lack of investment, but the minimization of malinvestment. It is not the reduction of state intervention. It is the rationalization of that intervention.
What EU should do, is not to better enforce the SGP, but to fundamentally revise the single currency, to broaden its policies, so as to make it viable for all member-states. It is not the SGP that will prevent future crises. Only further integration can do that. Only a political union with integrated fiscal policy can do that.
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