Also From the "This Time We Really, Really Mean It" Files

Apparently European leaders are close to an agreement that countries cannot run budget deficits higher than 3% of GDP.  If you are left to wonder, "hey, didn't they already have that rule before" the answer is yes.  Everyone had to promise a really, really stern oath not to run higher deficits before joining in the Euro group.

Of course, these promises meant nothing as there was no penalty for breaking the promise, and so the EU is proposing a new enforcement mechanism

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I am not clear if the 85% is of the whole EU  (which would require a vote of 23 of the 27 members) or of just the Euro zone (which would require 15 of the 17 countries that use the Euro as currency).  Either way, I disagree with Drum and can't see how there is any hope at all here.  I am left with a number of questions

  • What is the likelihood that European countries will adopt this Constitutional provision and precedent for reduced sovereignty?  Don't treaty changes have to be unanimous?
  • Even if ratified, does anyone imagine the penalties will be high?  Imagine Greece today if such penalties exist.  How much are they going to worry about fines when they are already bankrupt?  And what will be the optics of the EU adding new costs to countries that are in financial crisis?  If a country in the future is doing things to endanger the euro from too much debt, the last thing the EU is going to be able to do is add to that country's burdens -- in fact, it is doing the opposite now, sending huge checks to all these countries
  • How are they every going to get the votes when this comes up?  Again, think about today.  Would Italy, Belgium, Spain, Ireland, etc. vote to sanction Greece, when they know they are next?

I just can't see this going anywhere.  And I would be surprised if the folks involved do either.  My guess is that they hope this will settle the bond markets so they can kick the can down the road.  Sure, we will have to deal with this all over again the first, inevitable time a country breaches the 3%, but that is later and right now they will accept a few years, even a few months, of survival.


  1. James H:

    Another question would be: since all of these countries seem to hold vast amounts of each other's debt, who would vote to sanction if it meant hurting the value of the debt? The sanctions would seem to be a nuclear option, that would also explode on the sanctioner.

  2. steve:

    This is kind of amusing. Even funnier considering "sanctions" to Americans usually means some kind of economic embargo or no fly zone as prelude to war. When I first read it I envisioned World War III starting after another decade of kicking the can when Germany finaly gets fed up and rolls into France once again in order to "foreclose" on the mortgage.

  3. Sean:

    Since there always seems to be 4 or 5 countries perpetually in financial trouble, the veto power of %15 of the states makes the rule completely meaningless.

  4. John O.:

    The whole system is just a giant bomb tied to everybody's hands in Europe. It'll do nothing but explode in their faces should they even attempt to enforce debt ceilings and it will explode if they just continue to print money to bail each other out. They're in so deep maybe the "MAD" suicide option might be the only way out as it could be painful for a shorter amount of time.

  5. Ted Rado:

    The deck of the Titanic is getting very worn from rearranging the deck chairs. All sorts of paper shuffling schemes abound, but the basic problem remains the same: everyone is spending more thn they earn. All that the current meetings accomplish is to kick the can farther down the street.

  6. delurking:

    "... kick the can down the road..."

    But this is the whole point, isn't it? Keep delaying until all the banks have found ways to hedge their bad debts. The longer they can keep delaying actual bankruptcies, the less far-reaching the domino effect.

  7. morganovich:


    there were penalties before too.

    offending countries were supposed to be fined 0.5% of gdp.

    this was a condition required by germany in the original treaties. then, when the costs of reunification ran higher than expected, germany was the first to break the limit, failed to pay anything, and opened the door for everyone else to do the same.

    this was never a terrible realistic set of rules. "you are in recession and running a big deficit, now explain to your citizens that you have to pay a huge slug of gdp to the EU" just does not fly.

    all the rosy assumptions about the EU being an optimal currency area are looking pretty threadbare.

    greece and spain are never goignto be well served by german interest rates.

  8. Sebastian:

    The house of cards will fall when the last debtor can no longer pay . . . and then we will see Mad Max in the Western World.