The budget that complicates the two largest economies in Europe

When the European Union decided to deepen the integration between its economies and launch a common currency, it set strict conditions for companies that would join the Eurozone, as part of the Maastricht Treaty: no more than a 3% deficit annual, no more than 60% national debt (in relation to the annual GDP). This was somewhat the fiscal equivalent of the “end of history”: the security crises are over, the days of the inflation crisis are over, global trade is guaranteed, everything that is needed is stable monetary management of the economy, without budget riots, and everything will be fine.

But the last few years have proven that history is alive and kicking. A global corona epidemic that manifested itself in the breach of all budget frameworks and ad hoc spending of hundreds of billions of euros by governments on the continent; An inflationary crisis the likes of which has not been recorded since the 1970s, with a spike in energy prices; Unprecedented interest rate increases in their frequency and scope; and defense spending on a scale that no one dared to predict, in the era after the end of the Cold War. All these turned the apparently binding conditions of Maastricht into a joke.

A new reality

The new reality is changing the order they have become accustomed to on the continent, overthrowing governments and even challenging the status and role of the European Central Bank (ECB). France, for example, with a current debt of 112% of GDP and an annual deficit of more than 6%, looks down on the conditions of Maastricht. When the last government appointed by President Emmanuel Macron tried to convey responsibility and reduce it, it encountered opposition from the right and the left. Demands to increase pensions , to subsidize products, to fight the cost of living, to energy grants and cancel the retirement age increase The result: the government has fallen, and a new one is trying to pass a different budget these days. The public does not want austerity.

Alongside France stand many other countries in the Eurozone, including Greece (163%), Italy (137%) and Spain (100%), who look down on what was supposed to be a binding standard. In fact, the average debt in the Eurozone is close to 90%, very far from Maastricht’s ambitions, and closer to the figures that heralded a European debt crisis in 2009 and after. These figures are reflected in the yields on the government bonds of these countries, which recently broke records along with those of the US, UK and even China. Those of France, for example, even surpassed the returns of Greece.

The institution that holds everything

Even in neighboring Germany, with a relatively modest debt of 62%, the issue is at the center of the political agenda. The current government fell because of the finance minister’s refusal to deepen it artificially. In Germany, they are committed to higher standards than those of the Maastricht Treaty, with a permissible annual deficit of only fractions of a percent. But the country has grievances that it is “left behind” while the economies around it allow themselves to open their wallets without account. It is hard to see a soon-to-be German government not working to increase its deficit, given the extraordinary circumstances Europe is currently experiencing. In Germany as well, budget and deficit issues are critical, and the question of whether the political system will be able to deal with them responsibly is a cause for concern.

And as if that wasn’t enough, the whole fine structure of economies with different levels of debt that have a common currency is held by the European Central Bank. The ECB has adopted a new role: to keep the yields of the EU member states artificially low. Since Mario Draghi’s “We will do whatever it takes” speech, he has become, for example, the sole buyer of Spanish and Italian government bonds. He suppresses the yields on them and in fact “delegates” the fiscal responsibility of countries like Germany, the Netherlands and Finland, to the economies of the waste” of southern Europe and the Iberian Peninsula. The question of how far he will go may be reopened, now that yields are climbing Globally, both at the national level and at the level of the European Union, the current era of debt does not bode well, perhaps on the contrary. In the meantime, until a new announcement, the Maastricht rules are suspended.