The one and only budget of the Eurozone to become fully operational should be based on the full implementation of the correct fiscal stability rule in all the budgets of the general governments of its member states.
The incomplete fiscal framework of the Eurozone/EU
The EU has in general set a proper fiscal framework in which should move the state budgets of the Euro-area member-states. But this EU fiscal framework at best of situations can be described as incomplete if not problematic.
by Thanos S. Chonthrogiannis-https://www.liberalglobe.com
The result of this fiscal framework is that there are gaps and conflicts both as much between the governments of the Euro area member states as between the Governments of the Euro-area member states and the European Commission. Many times, and especially in the last eight years, these conflicts are beginning to take on a national character, due to other serious social issues that are plaguing the Eurozone/EU (e.g. the issue of illegal immigration), putting on the table the risk division of the Eurozone.
As a result of this poor fiscal framework of the Eurozone/EU, it is the Euro-area member states to stand up to groups according to their common political or economic interests, often arguing between them, and can then be forced to make large concessions or even painful compromises in relation to their original positions.
This fiscal framework of the Eurozone/EU is based on two basic treaties. In Treaty of Maastricht (December, 1991) (or Treaty of the European Union (Feb 1992), Source׃ http://europa.eu/eu-law/decision-making/treaties/ pdf/ treaty-on-european_union/treaty_on_european_union_el.pdf, 29/7/2015) & the New Stability and Growth Pact (Source EU, http://ec.europa.eu/economy-finance/economic governance/sgp/indexμ . el.htm , 3/8/2015).
Unfortunately, this fiscal framework set by the EU because it is incomplete will not lead the economies of the Euro-area member states to their priority budgetary, fiscal and economic convergence to become then operational the one and only common budget between the Eurozone member states.
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The issues to be considered
The first issue that should be raised directly is how to achieve the requested fiscal convergence between the economies of the Eurozone member states, so that the policies of fiscal austerity (curtailment of public sector expenditures) always lead to a steady growth in economies that are under implementation of fiscal adjustment-policies.
This issue has never been put on the conversation table by the Commission. Perhaps because it touches on sensitive political chords in most of the Eurozone/EU member countries.
A further issue for the European Commission’s discussion should be whether it is right for Eurozone member states to follow the fourth Condition laid down in the Treaty on European Union (Dec 1991) or as it is widely known as the Maastricht Treaty)-in other words, there should be a low budget deficit in the annual budget of the general government of a member country (general government budget deficit ≤ 3% in relation to its GDP) and as it is defined as a fourth condition for an EU member country to become a full member of the Eurozone.
While the right one that must be defined only for Eurozone member states is that Euro area member states should present a balanced annual general government budget as a minimum condition (I am not referring to the entry criteria and conditions laid down in the Maastricht Treaty to become an EU member state full member of the Eurozone).
Essentially, the fourth condition of the Maastricht Treaty will must be amended only for Euro area member states and to make a zero-budget deficit in the annual budget of the general government in relation always to the GDP of the Euro area member state. In other words, the annual budget of the general government of a Euro-area member state will always be a surplus annual general government budget regardless of the size of budget surplus.
For this reason, through a series of analyses-articles that we will present to Liberal Globe, we will demonstrate, among other things, how this can be achieved independently of the situation of the economy (growth or recession status equally) of the under-consideration Euro-area member state. While all these implemented fiscal policies will also bring about growth in the economies of the Eurozone member-states.
At the same time, we will demonstrate how will be achieved this fiscal, tax and economic convergence of Euro-area member states, which will then lead to a single and operational budget for the Eurozone.
Of course, the annual balanced budget of the general government of a Euro-area member state will must include the repayment costs of any annual interest rates of the general government’s sovereign debt member state.
Before we proceed to the answers and analyses of these issues, we will must clarify to the reader who is not familiar with the fiscal economics how is defined the annual expenditure and revenue budget respectively of the general government of a Eurozone/EU member state.
How is defined the general government budget
When we refer to the annual balanced budget of the general government of a Eurozone member state, we must first clarify what this annual state budget consists of.
The following equation (A) gives us the sectors whose annual revenue and expenditure budgets respectively and always by adding them in total constitute the annual state revenue and expenditure budget respectively of the general government of a Eurozone/EU member state.
General Government=Central Government + State Government + Local Government + SSF (Α)
where, SSF: Social Security Funds
The definition of the equation (A) is given by the Eurostat, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_10a_ exp&lang=en, 24/12/2018)
The proper fiscal rule for all Eurozone member states
Based on the above equation (A) which defines the state budget of the general government of a member state, it will must hold as a minimum condition for Euro area member states zero budget deficit in the above equation (A) (general government budget in balance) in relation to the GDP of the Eurozone member state.
In other words, a zero-budget deficit in the general government’s state budget as the minimum acceptable fiscal condition. The general government’s balanced annual state budget will must also calculate the costs of repaying the annual interest rates of general government’s sovereign debt.
If a Eurozone member state breaks this rule, will must be taken by its government immediate corrective measures of a fiscal nature. Otherwise, will must be imposed fines and measures by the Commission. The above fiscal rule will must apply both on a short and long term basis equally.
Zero budget deficit in the general government’s state budget annually, including the annual interest rates of sovereign debt, as a minimum acceptable treaty (we are essentially referring to permanent annual budgetary surpluses regardless of their size) it will work for Eurozone member states as an incentive to avoid new borrowing.
Incentive to avoid for new and easy borrowing from the international capital markets and not only. In this case the governments of the Eurozone member states will endeavor to implement on a consistent basis fiscal policy reducing the size of their public debt service costs in their state budgets.
In this way, the governments of the member states will have more funds in the long term to allocate to other governmental sectors of their budgets, avoiding parallel the easy choice of borrowing from the capital markets. While when the governments of the member states choose to borrow capitals, this will be done after a thorough examination of the benefits that they will have by making this political-fiscal decision.
Only when there is certainty after a detailed examination that the any projects or policies that will be financed through external or internal borrowing will generate multiple profits-state revenues and/or social benefits in their countries and more generally in their societies, then and only then will decide the choice of borrowing.
Essentially with the implementation of this fiscal rule that we propose for an annual balanced state budget of the general government (zero general government budget deficit in relation to the GDP of the Eurozone member state), including in this and the annual expenditure of service the general government’s sovereign debt, the choice of borrowing will not be done effortlessly, without thorough study and without thought.
Moreover, the governments of the Euro-area member states in their effort to reduce public spending on repayments of their sovereign debt will always choose rational policies to help increase the GDP in their economies. Once this fiscal rule has been reached by all Euro-area member states, the euro will become aspic the world’s strongest currency in the long term.
How will must be carried out the fiscal consolidation of a Euro area member state?
The fiscal consolidation of a Eurozone member state should be done with specific policies that depending on the economy in question and it should be a combination of fiscal measures.
However, these applied fiscal policies should have in their «core» the application of the “theory of optimum currency areas”-Mundell R.(1961)(“A Theory of Optimal Currency Areas”, American Economic Review, 51), McKinnon R. (1963) (“Optimum Currency Areas”, American Economic Review, 53׃717-725), Kenen P. (1969) (“The Theory of Optimum Currency Areas׃An Eclectic View”, in R. Mundell and Swobodaa, Monetary Problems of the International Economy, Chicago׃University of Chicago Press).
For example, the fiscal consolidation in the Greek economy through its launch (2010) of the application of the theory of optimum currency areas it would not have these problems that occurred in the Greek economy during the implementation of the support programs Ι (2010-2012), ΙΙ (2012-2014) & (2015-2018) in the Greek economy and society respectively.
Since the relative fiscal adjustment of the reduction of primary public sector expenditures in the state budget of the Greek central and general government respectively took part from:
i) By 70%, by massive and immediate redundancies of hundreds of thousands of illegally appointed civil servants who were nominated during the period (2001-2018) in the Greek public sector, including in these sizes and their respective operating expenses,
ii) by 15% from a horizontal reduction to the total nominal wages and pensions
iii) by a 15% increase in tax on the economy.
The above rates of fiscal adjustment that are presented in the i) 70%, ii) 15%, iii) 15%, respectively will must be the maximum rates of reduction of public sector expenditures by category of i, ii, iii, which can be implemented by a government and to be altered according to the identified problem in the under-consideration economy.
In summary, we will mention that the above presented fiscal adjustment (70%, 15%, 15%) it was never achieved in Greece because, as everyone knows, it did not allow the political system of Greece.
Given that the application of such a type of fiscal adjustment would cause a “deadly” disaster in the existence base of the Greek political system in the so-called “customer relations” that exist between the political system and the voters through the illegal appointments of these voters and their families to the Greek public sector.
The eight-year continuous fiscal adjustment of the Greek economy was based solely on a series of continuous reductions in nominal wages and mainly in nominal pensions (more than twenty reductions for pensions) and with a tremendous increase in the overall direct and indirect taxation in the economy.
At the same time, were made massive illegal retirement of civil servants, and no civil servant has ever been fired. The retirement of many civil servants should have caused the collapse of the civil servants’ social security funds (because these civil servants chose to retire in less than the planned insurance and pension time periods).
Therefore, the Greek political system in order to rescue its “clientele”-civil servants opted the merging of all public and private social security funds into a single social security fund.
Subsequently, the Greek political system by constantly reducing the level of nominal pensions to all pensioners in both the private and public sectors, it used the liquid reserves of the private social security funds to cover the deficits of the social security funds of civil servants, deficits which caused by the massive number of civil servants’ retirements.
In this way the Greek political system never proceeded to any dismissal of a civil servant. A rational fiscal policy should include, in addition to the above presented fiscal adjustment (70%, 15%, 15%), the creation of a social security funds market comprising of all the social security funds (private and public). In this market will competed among the social security funds, with their main objective to be the enrollment in their organizations the greatest possible number of insured persons.
This would achieve through the increasingly competitive social security services and the ever-lower social security contributions to employees and workers.
The unofficial bankruptcy of the Greek State (10/01/2010) came from the gigantic expenditures in the Greek public sector, with a terrifying number of illegally appointed civil servants in the Greek public sector who were accompanied with the highest wage and pension expenses, with huge expenditures on healthcare and national defense, but also for the state corruption.
At the same time, as it took place this fiscal adjustment to the primary public sector expenditures in the budget of the Greek central and general government respectively, the Greek governments would have to qualify in short time the privatization of specific public sector agencies, companies and services of the Greek state.
With this fiscal synthesis, in terms of reducing public sector spending in the budget of the Greek central and general government respectively, would not have precipitated the aggregate demand and the private consumption in the Greek society.
While it would have avoided the total official decrease of the Greek GDP (cumulative recession) in six years period (2008-2013) and would not have reached 29,7% of GDP (Source׃ Eurostat, http://ec.europa.eu/eurostat/ tgm/table.do?tab=table&init=1&language =en&pcode=tec00115&plugin=1, 01/08/2018).
At the same time, would have been avoided the launch of real unemployment in the private sector at high heights, which currently the annual official unemployment varies at 21,5% (2017) (Source׃ Eurostat, http://appsso. eurostat.ec.europa.eu/nui/show.do?dataset=une_rt_a& lang=en, 26/07/2018).
The Greek society would never have reached the point of more than 1/4 of the Greek population to have gigantic overdue debts to the Greek state (more than €103 billion, November 2018), while more than 10% of the total population is in a state of poverty with more than 34,8% of Greece’s total population at risk of being in poverty or at risk of social exclusion (2017) (Source: Eurostat, http://ec.europa.eu/ eurostat/tgm/table.do?tab=table&init=1&language=en&pcodetipslc10&plugin=1, 19/08/2018).
In addition, we will have to point out that the application of the theory of optimum currency areas works much better if there is a complete flexible labor market and if the composition of the GDP of the under fiscal adjustment economy is made up of its exports of at least more than 30% (this percentage does not include exports under edit oil products since this economy is not an oil producer, i.e. Greece).
Of course, the above characteristics did not appear at the time, nor today in the Greek economy.
Thanos S. Chonthrogiannis
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