FESSUD Seminar, Leeds University Business School, 22 January 2013

## Enforcing austerity in Europe: the structural deficit as a policy target

## Hugo Hugo

## 1. Introduction

In December 2011, more than two years and twenty-odd summits into the Eurozone’s sovereign debt crisis, the European Commission announced a new Fiscal Pact, designed to ensure that the crisis would never be repeated. The Pact formed part of the wider Treaty on Stability, Coordination and Governance (TSCG), which was signed by 25 EU governments in March 2012. Together with other changes such as the revisions to the European Stability Mechanism and the proposals for a European Banking Union, the TSCG has been widely and rightly interpreted as signalling a commitment to austerity for many years to come, and this in turn has helped to galvanise opposition in politics, the media and the street across Europe. It has also been seen as an attack on democracy, given that it transfers powers from elected national parliaments variously to the European Central Bank (ECB) and the European Court of Justice (ECJ) (see e.g. Jennar 2012).

Political economists have provided critical analyses of the Fiscal Pact (hereafter Pact) and the TSCG, such as Sawyer (2012) and the very detailed joint study by IMK (Düsseldorf), 2012).2 OFCE (Paris) and WIFO (Vienna) (IMK, Mainstream economists have also in the last year become more critical of the pace of spending cuts (e.g. Holland 2012), while even the IMF and OECD have expressed concern. However, it is by no means clear that the critics are winning the war of ideas. Many people, even among those who have directly suffered from austerity measures, still accept the neoliberal argument that the public debt must be ‘brought under control’ regardless of the social cost, because it is the state (and thus ‘the public’) that is responsible, rather than reckless behaviour in the financial services sector and the negligence of central banks and regulators. It is therefore very important to identify the weakest links in the chain of reasoning that is being deployed by the proponents of the Fiscal Pact, as well as by other governments such as the UK Coalition who are, in effect, taking the same approach. This paper argues that a key starting-point for a more penetrating critique is the concept of the structural deficit (hereafter SD).

At first sight, the SD seems to be merely a technical change with regard to the deficit target and the means of ensuring the compliance of member states. Clause 4 of the original EC statement of 9 December 2011 states that the crucial indicator of pact compliance was to be a legally-binding structural deficit target of 0.5%, supplementing the famous limits set by the 1992 Maastricht Treaty (on all EU states), of 3% of GDP for the fiscal deficit and 60% of GDP for outstanding sovereign debt. Although this concept has a much longer history within the complex calculations that underpin fiscal and monetary policy in all the major economies, the EU’s Pact marks the first time that it is to play the role of a quantitative target; it is also the first occasion, certainly in the EU, that such a target is to be made legally binding. The aim of this paper is to explore the implications of this for the future character of macroeconomic policy-