Work on the golden rule has been underway for months, but after markets took a beating a couple weeks ago on false rumours France’s credit rating was to be downgraded over the eurozone debt drama, it has gained a new urgency.
The effort was applauded by German Chancellor Angela Merkel at a recent summit with Sarkozy, with balanced budget rules becoming a political leitmotif for European leaders.
In France however, the opposition Socialists, whose votes are needed to amend France’s constitution, have so far refused to go along with the measure, all but eliminating its chances of becoming law.
Economists, even ones who support a balanced budget amendment in principle, say the Sarkozy version is essentially toothless.
“I think it is very important to have a ‘golden rule’ and in the current situation it’s indispensable and urgent,” Charles Wyplosz, professor at the Graduate Institute of International and Development Studies in Geneva, said.
“But not this version which is complicated, far-fetched, badly done, imprecise and easily circumvented,” he said.
The “golden rule” announced in March by the Sarkozy government isn’t actually a balanced budget amendment per se, but a renewable law that would establish deficit targets for the subsequent three years.
If the targets were missed, France’s constitutional council could then strike down spending laws such as the annual budget and/or social security financing.
Wyplosz said the proposal was “a pile of laws” that vaguely promises a balanced budget, “but doesn’t explain what it means, how we get there, nor when.”
France already has a commitment to budget discipline with the Maastricht treaty, said Henri Sterdyniak from the French Economic Observatory who believed that measures like the “golden rule” are counterproductive in crisis times.
In 1992, the Maastricht treaty laid down the foundations for the eurozone, the now 17-member single currency union, and required countries adopting the euro to keep public deficits at 3.0 percent of gross domestic product and public debt at 60 percent of GDP.
Sterdyniak pleaded for a “real” golden rule, an idea by French economist Paul Leroy-Beaulieu in the 19th century that a state should only borrow what it invests towards the future, like infrastructure and research.
Local governments in France already have such a restriction.
“When economic activity is bad, we are forced to run deficits,” Sterdyniak said, noting that Sarkozy defended that notion as he navigated the 2008 financial crisis.
The economist argued that countries like France had to only keep deficits under the eurozone ceiling of three percent of annual output.
“That would ensure that our debt stays pretty much stable,” Sterdyniak said.
Jacques Delpla, who as a member of the French government’s Council of Economic Analysis helped come up with the current “golden rule” proposal, said that the amendment would only work if it was credible.
“A budgetary rule allows you to avoid barbaric deficit reductions when you move out a crisis,” Delpla said.
“When interest rates are low, we are tempted to let the debt accumulate. Then we explode when rates increase again.”
Delpla said that France should learn from the Germans and Swiss who have constitutional amendments that limit deficits to 0.35 percent of GDP and can be modified according to circumstances.
France last had a balanced budget in 1973 and all pledges to save tax receipts in the good years for difficult times ahead have been sabotaged by politics, Wyplosz said.
“It’s what we’ve never been able to do in France. That is, whether good year or bad, we’ve always run deficits,” Wyplosz said.
“My worry is that by passing this law as is, in a few years it won’t have worked and the principle itself will be discredited because the version adopted was the wrong one,” he said.