2005/03/20 - Gabriel Calzada - Libertad Digital

European Hari-Kari

Limiting spending, what goes out, to what comes in does not guarantee economic growth –imagine a balanced budget with taxes confiscating 90% of income. A public deficit, however, submits the economy’s earning cows to serious liposuction.

Every time the euro area’s Economy Ministers sit down at a table, our wallets tremble. When they are sitting down to decide how to bury the Stability Pact’s conditions designed to limit spending, spending they incur at our trembling wallets´ expense, society in general trembles. And this is what is happening as I write this article.  

Limiting spending, what goes out, to what comes in does not guarantee economic growth –imagine a balanced budget with taxes confiscating 90% of income. A public deficit, however, submits the economy’s earning cows to serious liposuction. A higher level of public spending, with or without a deficit, means using resources in ways increasingly distant from how consumers otherwise would: an economic imbalance induced by the zeal for spending money previously snatched from us with the excuse of spending it in our true best interests. People are just not so naïve!

Public budget deficits have to be covered by additional taxes, inflation or public debt. Any one of these measures depresses the already anaemic euro area further. The first is like going out to the store and never coming home. The second distorts the entire productive structure by upsetting inter-temporal coordination through the forced redistribution of resources. The last, asphyxiates private entrepreneurial projects by making credit scarcer. At the same time, these measures shake the very foundations of the euro´s value and, as a result, the purchasing power of our income.     

What pushes our dear Ministers to water down the Pact on balanced budgets in Europe? We can only speculate. One possible explanation is the old and arrogant conviction money spent by the government spurs miraculous multiplier effects that cannot be achieved through the spending of the same money by its rightful owners. But such fables probably do not have the same weight or influence as in the past. The key lies in profligate and powerful governments pressuring to avoid having measures they once imposed on others applied to them since, in the interim, they have managed to turn their countries into empty lots where no one dares produce and too many seek to live off public largesse.    

Perhaps a few words from Juan de Mariana, one of Spain’s 16^th century scholastics, might convince these Ecofin-men better than a ton of economic reasoning: “The King cannot spend revenue supplied him by his kingdom with the same freedom as an individual spends the fruits of his own vineyard or inheritance.”