The meeting of EU leaders on night of Thursday/Friday 8/9 December was the latest in a succession of such meetings designed to solve the eurozone’s problems (see also, Part A, Part B and Part C in this series of posts from earlier this year).
Headlines in the British press have all been about David Cameron’s veto to a change in the Treaty of Lisbon, which sets the rules of the operation of the EU and its institutions. Given this veto, the 17 members of the eurozone and the remaining 9 non-eurozone members have agreed to proceed instead with inter-governmental agreements about tightening the rules governing the operation of the eurozone.
In this news item we are not looking at the politics of the UK’s veto or the implications for the relationship between the UK and the rest of the EU. Instead, we focus on what was agreed and whether it will provide the solution to the eurozone’s woes: to fiscal harmonisation; to stimulating economic growth; to bailing out severely indebted countries, such as Italy; and to recapitalising banks so as to protect them from sovereign debt problems and the private debt problems that are likely to rise as the eurozone heads for recession.
The rules on fiscal harmonisation represent a return to something very similar to the Stability and Growth Pact, but with automatic and tougher penalties built in for any country breaking the rules. What is more, eurozone member countries will have to submit their national budgets to the European Commission for approval.
The agreement has generally been well received – stock markets rose in eurozone countries on the Friday by around 2%. But the consensus of commentators is that whilst the agreement might prove a necessary condition for rescuing the euro, it will not be a sufficient condition. Expect a Part E (and more) to this series!
Meanwhile the following articles provide a selection of reactions from around the world to the latest agreement.
EU leaders announce new fiscal agreement Southeast European Times, Svetla Dimitrova (9/12/11)
Eurozone crisis: What if the euro collapses? BBC News (9/12/11)
New European Treaty Won’t Solve Current Liquidity Crisis Huffington Post, Bonnie Kavoussi (9/12/11)
UK alone as EU agrees fiscal deal BBC News (9/12/11)
A good deal for the UK – or the euro? BBC News, Stephanie Flanders (9/12/11)
European leaders strengthen firewall Financial Times, Joshua Chaffin and Alan Beattie (9/12/11)
EU leaders push for tough rules in new treaty DW-World, Bernd Riegert (9/12/11)
German Vision Prevails as Leaders Agree on Fiscal Pact The New York Times, Steven Erlanger and Stephen Castle (9/12/11)
European Union leaders agree to forge new fiscal pact; Britain the only holdout The Washington Post, Anthony Faiola (9/12/11)
The new rules by EU leaders Irish Independent (10/12/11)
More uncertainty seen in wake of EU summit Deseret News (9/12/11)
EU president unveils raft of crisis-fighting measures The News (Pakistan) (10/12/11)
No rave reviews The Economist, Buttonwood (9/12/11)
Beware the Merkozy recipe The Economist (10/12/11)
Europe blunders into a blind, and dangerous, alley Guardian, Larry Elliott, (9/12/11)
As the dust settles, a cold new Europe with Germany in charge will emerge Guardian, Ian Traynor, (9/12/11)
Euro zone agreement only partial solution – IMF Reuters, Tova Cohen and Ari Rabinovitch (11/12/11)
Celebration Succumbs to Concern for Euro Zone New York Times, Liz Alderman (12/12/11)
In graphics: The eurozone’s crisis BBC News
- How do the latest proposals for fiscal harmonisation differ from the Stability and Growth Pact?
- How might a Keynesian criticise the agreement?
- What is the role of (a) the IMF and (b) the ECB in the agreement?
- Do you agree that the agreement is a necessary but not sufficient condition for solving the eurozone’s problems?
Twice a year, directly after the government’s Spring Budget and Autumn Statement, the Institute for Fiscal Studies gives its verdict on the performance of the economy and the government’s economic policies – past and planned. This year is no exception. After the Chancellor had delivered his Autumn Statement, the next day the IFS published its analysis. And what grim reading it makes.
• Real average (mean) incomes in 2011 will have fallen by 3%.
• Between 2009/10 and 2012/13, real median household incomes will have fallen by 7.4%
• Over the same period, real mean household income will have fallen by 4.7% – easily the biggest 3-year drop since records began in the mid 1950s.
• Real mean household incomes will be no higher in 2015/16 than in 2002/03.
• The poorest will be hardest hit by the measures announced in the Autumn Statement.
• Infrastructure spending of £4bn to £5bn will only go some way offsetting the effects of £17bn capital spending cuts over the Parliament.
• The economy will be 3.5% smaller in 2016 than thought in March.
• The structural budget deficit is 1.6% higher than thought in March.
• That will extend to 6 years the period over which total spending will have been cut year on year.
Referring to this last point, Paul Johnson, director of the IFS, said in his Opening Remarks, “One begins to run out of superlatives for describing quite how unprecedented that is. Certainly there has been no period like it in the UK in the last 60 years.” Referring to the fall in real incomes, he said, “Again we are running out of superlatives to describe just how extraordinary are some of these changes.”
Commentators have referred to the “lost decade” where the average Briton will not have seen an increase in real income.
Autumn Statement 2011: Families face ‘lost decade’ as spending power suffers biggest fall since 1950s, says IFS The Telegraph, Matthew Holehouse (30/11/11)
Autumn Statement 2011: IFS talks down George Osborne’s growth plan The Telegraph, Philip Aldrick (30/11/11)
Autumn statement study by IFS predicts lost decade for UK living standards Guardian, Katie Allen and Larry Elliott (30/11/11)
Britons Enduring 13-Year Squeeze on Living Standards, IFS Says Bloomberg Businessweek, Gonzalo Vina (30/11/11)
The UK now faces a ‘lost decade’ Financial Times, Martin Wolf (29/11/11)
Warning of seven-year squeeze Independent, James Tapsfield, Andrew Woodcock (30/11/11)
Osborne’s impact laid bare: The rich get richer and the poor get poorer Independent, Ben Chu, Oliver Wright (1/12/11)
Incomes to fall 7.4% in three years, says IFS BBC News (30/11/11)
No growth in income for 14 years, warns IFS BBC News, IFS director Paul Johnson (30/11/11)
UK economy: Third worst year since the war BBC Today Programme, IFS director Paul Johnson (29/11/11)
Autumn Statement 2011 and the OBR Economic and Fiscal Outlook IFS (30/11/11)
- Why is it likely that the median real income will have fallen by more than the mean real income?
- Why is the structural deficit now estimated to be some 1.6 percentage points higher than was estimated by the OBR back in March 2011?
- How could the structural deficit be affected by a prolonged recession? Is this a case of hysteresis?
- What are the government’s fiscal rules?
- Is the IFS predicting that the rules will be met? What might adversely affect this prediction?
- If technological progress is allowing a continuous increase in potential real GDP, why will median real incomes have fallen over the 13 years between 2002/03 and 2015/16? What might have affected long-term aggregate supply adversely?
The potential relevance of Keynesian economic theory has been sharply brought back into focus as governments struggle to find an appropriate mix of policies to try to avoid or mitigate the impact of recession on their economy. Chancellor Alistair Darling has relaxed fiscal rules to allow spending to rise in an attempt to boost aggregate demand and compensate for falling consumer demand.
How to kick start a faltering economy the Keynes way BBC Magazine (22/10/08)
Situation vacant: a theorist is sought to succeed Mr Keynes Guardian (11/10/08)
In praise of ….. John Maynard Keynes Guardian (9/10/08)
Spend, spend, spend: Alistair Darling adopts John Maynard Keynes doctrine Times Online (20/10/08)
Darling invokes Keynes as he eases spending rules to fight recession Guardian (20/10/08)
Follow Gordon Brown again and spend out of recession Times Online (14/10/08)
Economists condemn Chancellor Alistair Darling’s spending plan Telegraph (26/10/08)
Keynes, the man to get the Government out of a crisis The Independent (20/10/08)
||Explain briefly the Keynesian approach to the management of the level of aggregate demand.
||Using diagrams as appropriate, show the impact of the relaxation of fiscal spending rules on the UK economy.
||Discuss the extent to which a Keynesian approach to economic policy is likely to help the government avoid a recession in the UK. Is leaving the control of interest rates in the hands of an independent Bank of England a constraint on the effectiveness of this policy approach?
The article below by William Keegan is a discussion of a recent seminar he attended on ‘Black Wednesday and the rebirth of the British economy’. The seminar led him to consider whether policy makers should be guided mainly by rules or discretion in the development of policy. Many would argue that we have moved away from discretion and moved more towards fiscal and monetary rules for the implementation of policy, but the article discusses the extent to which this may be true.
When the going gets rough, can our rulers rely on the rule book? Observer (18/11/07)
||Explain, using examples as appropriate, the difference between policies based on fiscal and monetary rules and discretion.
||Explain how the MPC “largely ignores the cumulative dangers of a high exchange rate” in its determination of interest rates for the UK economy.
||Discuss how effective the adoption of an inflation target has been in management of the British economy in the past decade.