Sunday, December 11, 2011

Getting tough on EU deficits - we have heard this story before

Markets rallied on the news that the EU is going to get fiscal discipline and provide more help for deficit countries. This is an early Christmas present but it is not clear it is going to last. This is like going to one of those great Christmas parties with lots of cheer only we wake-up the next day and realize we still have to go to work and our co-worker's behavior is still the same.

Le's not forget that the euro-zone governments have self-imposed budget deficit limit of 3% of GDP. This was  an important part of the Maastricht treaty. If they followed their targets then the sovereign debt crisis never would have happened. Now the same governments that did not follow their own rules will now get some of that old time deficit religion. Hard to believe. There are reasons why the 3% rule was silly to begin with. It did not allow for large recession where deficit financing could be used to help the economy. Still we are ask to have faith in those who have never followed the rules. 

The euro-zone has a whole has not met the 3% rule. The Euro-zone as a whole as a deficit to GDP of -4.1 percent. Out of 17 countries only five are meeting their obligations for 2011. They are Luxembourg, Malta, Germany, Finland and Estonia. Only Luxembourg, Finland, and Estonia have met their obligations over the entire time of their entry in the EU. 

Austerity is the talk of Europe but creditability may be more important. 

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