Monday, August 22, 2011

Balanced Budget Acts in Europe

Noah Feldman opined
If you think balanced-budget amendments are the stuff of madmen or dreamers, you were in for a surprise this month.
Actually I think they are a good idea. Not a perfect slution, but a tool that could lead to a solution.
No, not the requirement of the U.S. debt-ceiling agreement that Congress vote up or down on such an amendment -- everyone knows that proposal will be dead on arrival. Rather, it was the joint recommendation of German Chancellor Angela Merkel and French President Nicolas Sarkozy that all 17 euro-area members adopt constitutional amendments by next summer that would require balanced budgets by specific target dates.
Striking fear into the hearts of the intelligencia.
In the context of the world’s current economic troubles, how could responsible, economically sophisticated leaders think it is a good idea to impose an inflexible constitutional debt ceiling? Merkel and Sarkozy are, after all, a far cry from Rick Perry.
But they still could all be right.
What makes mainstream politicians imagine that sovereign states would be helped, not harmed, by taking away their option to borrow and spend their way out of a fiscal crisis?
Perhaps the demonstrations in most European countries?
The answer lies in a naive but widespread understanding of how successful constitutions actually operate. The textbooks say that a constitution binds the government in advance so that in the future it will not do something tempting but foolish -- the way Odysseus bound himself to the mast when he knew the sirens would be seducing him. The idea is that a prior commitment will legally prevent later backsliding.
Not prevent but limit.
But the reality is much more complicated. Most constitutional provisions are written with loopholes, either explicit or implicit. A constitution almost never successfully binds the government from doing what it believes it must do to survive.
And it shouldn't. They should be free to have an unbalanced budget for a short time, such as war or national disaster, but not in the long time.
A creative interpretation of the document can generally be found sufficient to enable the government to do what it wants. Merkel and Sarkozy are well aware of this, so what are they after? First, they want to convince bond markets that poor euro- area members will not drag down the whole system by running up large deficits and then relying on France and Germany to bail them out. They aspire to use constitutions to convey this promise.
And Merkel and Sarkozy are from Germany and France. It is understandable that they don't want to be left holding the bag.
If the euro-area members really gave up the sovereign power of deficit spending, they would become much more like the American states.
Wasn't that the idea of a European Union?

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