The Sustainable Solution for the Eurozone (EU) Economy-Part II

The European Commission and in general the EU rightly has set specific fiscal limits on the budgets of the member states of the Eurozone through the:

1. Treaty of the European Union, Feb. 1992, widely known as the Maastricht Treaty-December, 1991 (Source׃ EU https://europa.eu/eu-law/decision-making/treaties/pdf/treaty_on_european_union/treaty_on_european_union_el.pdf, 29/7/2015, Brussels_Luxemburg 1992),

2. and the Stability and Growth Pact (November, 2011) (Source׃ EU, http://ec.europa.eu/economy-finance/ economic_governance/sgp/index.el.htm, 3/8/2015).

The non-effectiveness of the Eurozone fiscal framework

But these fiscal limits, especially those are referred on the Stability and Growth Pact, are incomplete and cannot simultaneously present the expected fiscal and macroeconomic effects in all euro area member countries.

This is since the specific fiscal limits are not accompanied by corresponding common fiscal-budgetary ceilings for all state budgets of Eurozone member countries. In other words, it does not exist maximum fiscal-budgetary limits applicable to the primary public sector expenditures on the annual budgets of the central governments of the Eurozone member countries.

by Thanos S. Chonthrogiannis

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The proper fiscal framework that will must exist in the Eurozone

In my opinion, there will must be maximum fiscal-budgetary limits to be applied by all Euro-area member countries which will bind the member states both in terms of the maximum level of primary public sector expenditures in the annual budgets of the central governments of the member states of the Eurozone and the maximum level of primary public sector expenditures on the payroll of all civil servants and governmental officials.

In order to create the highest inflationary pressures in the Eurozone as a result of increased levels of global aggregate demand by Eurozone citizens, the Commission should set a permanent and long-term ceiling on the public sector expenditures in the annual budgets of the central governments of the Eurozone member countries:

1. The permanent preservation of their primary public sector expenditures in the budgets of the central governments at the rate of 15% of their GDP annually;

2. With 4% of their annual GDP to be the maximum annual limit of annual primary public sector expenditures for public sector salaries in the budgets of the central governments respectively.

In other words, the primary public sector expenditures in the annual state budgets of the central governments of the Eurozone member countries must never exceed in total the ceiling of 15% of their GDP annually.

These pre-requisites will must be added to a new revised Treaty on European Union (February 1992) (Maastricht Treaty-December 1991) and a new revised Stability and Growth Pact (November 2011).

In the table below (Table 1), I present in detail the annual public sector expenditures of the central governments of the Eurozone and the EU and other countries outside the EU as a percentage of their annual GDP for the period (2010-2017). Analytically,

NOTES: We will must point out that the above-mentioned governmental expenditures of central governments include except the primary public sector expenditures of central governments, the unemployment benefit costs, defense costs, annual repayment costs of sovereign debt etc. The data for Croatia is (p) for all the years of the under consideration period. The data for Netherlands is (p) only for years 2016, 2017.

Table 1: Annual expenditures of Central governments as % of their annual GDP for the period (2010-2017). (Source: Eurostat, http://ec.europa.eu/eurostat/tgma/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec_00023, 19/08/2018)

We observe in the above Table 1 that only Germany (the only member state of the Eurozone and the EU respectively) presents over time constant annual public sector expenditures in the annual budget of its central government close to but less than 15% of its annual GDP.

In addition to Germany, Switzerland is also the only country that displays annual public sector expenditures in the budget of its central government of less than 15% of its annual GDP.

By setting the ceiling for e.g. 15% as an annual percentage of the GDP for the annual public sector expenditures in the budgets of central governments and seeing Table 1 above, we can understand the huge volume of resources that would be released from the annual central government budgets of member countries of the Eurozone and the EU.

These liberalized economic resources should be directed mainly towards the citizens of member states through the implementation of equivalent fiscal value measures in their economies.

Applying equivalent fiscal value measures to the economies with such policies so that will always reduce on equivalent size the corresponding sizes of their direct and indirect taxation, provided that first has been placed a maximum annual fiscal limit of 15% of their GDP on the annual public sector expenditures of the central governments budgets in all Eurozone and EU member countries respectively.

These released funds, which will be achieved by setting a maximum limit of 15% of their GDP annually on the annual public sector expenditures of the central governments budgets of member-countries (Table 1), appear as a percentage of their GDP for each year from 2010 to 2017 and correlation to Table 1, in Table 2 below,

NOTES: The sign (-) shows that in this case the central government will have to increase its public sector expenditures by the corresponding proportion of its GDP to reach the annual ceiling of 15% of its annual GDP.

Table 2: The annual funds which are released from the annual public sector expenditures of central governments budgets as % of their annual GDP and having first and foremost set the ceiling for annual public sector expenditures in the annual budgets of central governments the 15% of their annual GDP. Annual released funds that will then be free in the respective societies of the member countries through the implementation of equivalent fiscal value measures in the respective economies.

We note, then, that in this case the saved funds from the respective public sector expenditures in the annual budgets of the central governments of the Eurozone/EU are quite high.

Since there is a stable exchange rate of the currencies of the EU member states with euro (€), then the central governments of the EU member countries can follow this policy of 15% of their GDP as a maximum annual fiscal limit on their annual public sector expenditures in their central governments budgets and will be even more ready when they are going to enter as full members in  the Eurozone.

The results of these fiscal policies in the Eurozone

With the adoption and implementation of this centrally designed fiscal policy directly disappears any budget deficits in the annual budgets of the central and general governments equally of the Eurozone member countries, given that the other factors that make up the overall annual budget of the general government present balanced budgets.

At the same time, huge resources are being released that will must be directed to the citizens of euro area member countries through drastic tax reductions.

The key, however, is how these resources will be released in order to reach the “wallet” of the citizens of the Eurozone, and particularly the wallet of the citizens who belong to the lower and medium disposable income scale.

In the Eurozone member countries these huge resources to be released annually (see Table 2) should be directed mainly towards citizens who have low and middle annual disposable incomes through the implementation of equivalent fiscal value measures in the respective economies.

In more detail, these specific equivalent fiscal value measures that will must be implemented in the respective economies:

1. must cause drastic reductions in the size of indirect taxes (e.g. VAT) which burden all consumer goods and services; The high levels of VAT (Value Added Tax) that are imposed on goods and services «crucify» the citizens with low and middle size disposable incomes.

2. next, they will cause drastic reductions in taxes which are imposed on the rents and the maintenance costs of the housing, the costs of the energy sector, the agricultural production costs and the costs of the primary sector of the economy in general;

3. and at the end part of these equivalent fiscal value measures will must be implemented with such policies in order to further reduce the size of direct taxes and given that there is no in place high level of tax-exemption in the specific economies for the citizens with middle and low disposable incomes.

With this series of allocations will result a drastic increase in the annual disposable incomes especially of the citizens belonging to the low-and medium-income scale, creating a drastic increase in their aggregate demand and consumption respectively in the short term; Removing from them any uncertainty that probably they have about the future.

This drastic increase in total consumption will increase the production levels of enterprises which will then absorb the unemployment figures, while pushing companies to carry out any business plans that the moment has been postponed in loosely.

All this is achieved without the artificial increase of the money supply in the economy, i.e. without the granting of new bank credits, effectively circumventing the banking system and without altering the benefits of the social state to the citizens.

In addition, with the transfer of these enormous resources to society, which are now bound by central government spending mainly through direct and indirect taxation, will increase in addition to the levels of total consumption and the pace savings of citizens by increasing their deposit levels in commercial banks.

In this case, the commercial banks will gradually start to emerge from the hoarse of the negative interest rates offered by the ECB in their deposits, while increasing their entire deposit base.

The increase in the credit level of the banking institutions to sustainable investment projects will increase to lows levels of lending rates. In this case, the ECB will be able to gradually emerge from the warren of almost zero basic borrowing interest rate policy due to increased inflationary pressures in the Eurozone economy, removing the surplus liquidity that will exist every time in Economy of the Eurozone thus shrinking ECB’s balance sheets.  

But the question that arises is how the public sector spending should be shrink in the annual budgets of the central governments of the Eurozone member countries. This question will be answered in detail in the next part (Part III) of this analysis.

Thanos S. Chonthrogiannis

Prohibited by the law of intellectual property or in any way unauthorized use/ownership of this article, with serious civil and criminal penalties for the infringer.