“Debt-brakes”, debt limits, and an attack on the welfare state

Three big stories came out of the Brussels meeting. Each one was enough to spoil a nice weekend.

First, there was the UK’s decision to marginalize itself by vetoing a new Treaty. This forced the rest of the EU member states to decide on a side-treaty, like the Schengen open borders deal, rather than amend the EU treaties themselves. This could have all sorts of interesting effects- including a need for meetings and a secretariat, since neither the Commission nor the buildings in Brussels would be available to a parallel group. The UK has been carrying out the same balancing act for decades, staying in the club in order to influence it. The act is tiring, for all its successes. It is also getting harder and harder as generational turnover in the Conservative party makes it into a Eurosceptic party- a process akin to the way both American parties purified their position on abortion over the 1980s and 1990s. So it is no surprise that the very tactical and ideological Cameron quit trying. He got to please his backbenchers and press for 36 hours. 36 hours of unity with backbenchers who usually worry he sold out to the Lib Dems is reward enough.

The next big story is short-term: this deal solves nothing. There is still no “bazooka”  to intimidate financial markets, and Germany is adamant that there will be none. There is no visible deal in which this will induce the European Central Bank to act like a central bank for Europe and start backstopping government debt, and the ECB seems adamant that there will be none. Nor is there any creativity. What there is, is an amped-up version of the old Stability and Growth Pact signed with the Maastricht Treaty, which was supposed to levy fines on states that ran deficits. Both Germany and France blew it off, running deficits and not getting fined.

So what on earth is going on? The third story is about the ongoing campaign of right-wing social engineering coming out of Berlin. Germany’s extremely conservative finance minister, Wolfgang Schaeuble, gave the game away a few days ago when he welcomed the threat of ratings downgrades because it would be the “best possible incentive” to cut back on government expenditure. If he reminds you of House Republicans during the debt-limit debate, well, then, you’re right.

If this deal sticks and helps the Eurozone to survive, truly a big if, then it is the endgame for an explicit strategy to constrain the welfare state in Europe. The basic technology is what Germans call a “debt-brake” and Americans know as a balanced budget amendment. Countries around Europe have been passing or discussing them as a way to make credible commitments to the highly rational capital markets. This agreement would put them into European if not EU law.

Americans know what balanced budget amendments mean: boom-bust government and a welfare state that doesn’t work. Why do American states always start up health care or education programs (or build new university buildings) at the top of booms and then cut them back (or raise tuition) when need increases? Balanced budget amendments: when tax revenues drop, expenditure drops. Why do American states finance so much of their capital expenditure through impenetrably complex special purpose districts and so forth? To circumvent balanced budget amendments. In Europe, it will have all sorts of additional weird effects; Germany doesn’t count most of its health and pensions system as government debt, but Spain and Sweden do, so Spaniards and Swedes will have to suffer much more than Germans- not because of their virtue, but because of their accounting. It also, of course, has nothing to do with the crisis; in 2006, Spain and Ireland put profligate Germany to shame with their virtue. Their problem was the same as that of New York or Oregon: their economies collapsed, and tax revenue with it- something German’s current project would not stop.

Why would Europe, known for welfare states and solidarity, want this? Good question.  Why hasn’t the world press noticed that the people running the ECB, Germany, and a few minor states are using the same playbook as the Tea Party caucus, and with a similar goal? Also a good question.

That brings the three stories together. We should be thankful to Cameron because the UK’s action makes it much less likely that this new Stability and Growth Pact will work. Why? Because if this deal were to hold, the last thing anybody will be doing is learning about solidarity, egalitarianism or economic growth from Schaeuble’s big Bavaria. And meanwhile, we should all be asking the European Central Bank when it plans to do what it, and only it, must do if the Eurozone is to be saved- which is act like a central bank and print some money.


About scottlgreer

Associate Professor, Health Management and Policy at the University of Michigan School of Public Health. I am a specialist in the health politics and welfare states of of advanced industrial countries, with a special research focus on the politics of the UK, France, Spain and the European Union.
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