This is my quest, to follow that Pact
No matter how painful, no matter how wracked
To fight for the right, without question or pause
To be willing to tighten purse strings for a Heavenly cause...
Regular readers should be aware of my strong predilection for euro currency over the American equivalent. Is it irrational? This bit of news suggests otherwise as our European friends are hellbent on maintaining a semblance of fiscal conservatism in the face of a full-blown global slowdown. Pump priming is, to these fine fellows, overpumped. Yes, The Man of La Mancha is real, it's just that he's actually The Man from Brussels. Let me explain.
The whole world knows Uncle Sam's game plan of running somewhere between a trillion dollar and a two trillion dollar deficit in 2009--a level of (fiscal) debauchery unseen since the heyday of Sodom and Gomorrah. Obama...McCain...it doesn't matter; America's debt-loving ways are moving in a big way from the private to the public sector in an orgy of IOUs. Ultimately, the question we must all face is this: "Is lack of fiscal rectitude the same as lack of moral rectitude?" If you ask me, the answer is in the affirmative for reasons I will outline in a future post. Somehow, I doubt whether America's current bout of debt-fueled megaspending is the change America needs (for there is no change to begin with).
One of the current weaknesses American politicians have irrespective of affiliation is the inability to prescribe thrift and sacrifice as virtues in favor of uneconomic "free lunch" promises. In this respect at least, European leaders are different. In contrast to the American spender-in-chief-elect and his minions, EC officials have stated that they will, as much as possible, try and stick to the stipulations of the Stability and Growth Pact. Among other things, it mandates that countries not run budget deficits larger than 3% of GDP. Yes, notable violations have and will occur, but for the region as a whole, the EC's deficit should be far smaller than that which will be run by America in 2009 and beyond. From Reuters:
Euro zone finance ministers pledged on Monday to stick to European Union budget rules even though economic growth is seen halting next year, in a deal the European Commission hailed as needed policy cooperation."This is not the time to let deficits rip" and "[w]e don't want to indulge in an orgy of spending and indebtedness -- in essence, mortgaging future generations" are clearly referencing Uncle Sam. Hocking the future is oh so very American. I don't doubt that there will be more pain for the Europeans as a result of trying to meet the Pact, but America's recession in going to be even worse and the consequences of its current profligacy will be paid for in the future bigtime. Given the Eurozone's reluctance to engage in fiscal debauchery, holders of euro currency know they're in a safer set of hands than American ones. They're sacrificing their welfare so that holders of their currency won't be get a raw deal. What more can you ask for?
"This is not the time to let the deficits rip," said Jean-Claude Juncker, chairman of monthly talks among the finance ministers of the 15-country currency area. "We don't want to indulge in an orgy of spending and indebtedness -- in essence, mortgaging future generations," he told a news conference after their Monday talks.
The ministers backed European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change. They also supported the Commission's estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the widening of the deficit, mainly as a result of a natural fall in revenues and a rise in expenditure, already constituted a significant fiscal stimulus for the euro zone [the much-vaunted "automatic stabilizer"]. But while a general revival package for the whole euro zone was unnecessary, upholding public demand through targeted, short-term measures was crucial, Luxembourg's Juncker said. "Growth is not being fuelled by private consumption or investment but by public demand," Juncker said. "It is a question of organising public demand in an orderly fashion. "Public investment should continue to be at a high level. (Governments can use) fiscal or budgetary means to support short-term positive developments," he said.
Almunia welcomed the ministers' agreement to abide by the EU budget rules, the Stability and Growth Pact. He called it much-needed cooperation on the real economy, like earlier agreed measures to restore confidence in the banking system. "There is a 100 percent consensus to implement the pact under these difficult circumstances," Almunia said. "This is an extremely good substance of cooperation that there is peer support for those who had budgetary difficulties and peer pressure for those who have not decided yet how to comply with the Stability and Growth Pact," Almunia said.
The pact says EU countries should not run budget deficits higher than 3 percent of GDP or they will face disciplinary steps that could result in fines. But it also says that in tough economic times, countries may take longer to bring such a shortfall back in line...
The Commission estimates that euro zone GDP fell 0.1 percent in the third quarter of 2008 after a 0.2 percent contraction in the second, adding up to two consecutive quarters of negative growth -- a common definition of technical recession. The economy is to shrink 0.1 percent in quarterly terms in the fourth quarter, it said, and warned that further worsening in financial markets could push the euro zone into outright recession...
The euro zone outlook is still better than for the United States, whose economy the Commission forecasts to shrink 0.5 percent next year. The EU executive expects Japan to contract by 0.4 percent in 2009. In the wider European Union, Britain's economy is seen shrinking 1 percent next year, the Baltic states of Estonia and Latvia will contract this year and next, and Lithuania will shrink in 2010, the forecasts showed.
Euro zone inflation is likely to slow to 2.2 percent next year from 3.5 percent seen this year and decelerate further to 2.1 percent in 2010, the Commission forecast. The European Central Bank wants inflation to be just below 2 percent, but consumer-price growth was boosted by surging oil and food prices in the 12 months to mid-2008.
The bank has signalled it may cut interest rates in November as inflation risks have diminished, a prospect welcomed on Monday by BusinessEurope, an umbrella organisation for some 20 million European companies.
The current bout of "special FX" should soon peter out as economic reality sets in. Preserving the value of the euro still means something to the EC, in contrast to some others. And the world will be better for this, indeed.