June 3, 2014 | by Daniel Hinšt Print

The European Union has a rule to prevent member states from running up excessive budget deficits and debt. How’s it working?

Before answering that question, let’s look at the rule, which is also a criterion for gaining admittance to the eurozone. The rule mandates that the annual government deficit may not exceed 3 percent of GDP and that public debt may not exceed 60 percent of GDP. Hence, the 3-60 rule.

But why 3-60? Why not 1.5-30? Estonia balances its budget and has a debt that’s only 10 percent of GDP.

Now for the results. According to 2013 Eurostat figures, government debt for EU members averaged 87 percent of GDP. So much for the rule. On the bright side, Estonia, Latvia, Lithuania, Luxembourg, Sweden, and some others abide by the debt side of the 3-60 rule.

The majority of EU members have GDP-deficit ratios in violation of the rule and so face the “excessive deficit procedure.” This usually requires cuts in government spending. Unfortunately, politicians may instead increase taxes to reduce the deficit. But this makes things even worse by removing resources from the private economy. It’s a shame the EU has no rule limiting spending and taxation.

Of course, even if members respect the rule for deficits, they can still increase their debt in violation of that part of the rule.

As we can see, the 3-60 rule is no way assure a prosperous economic future for the EU.

Do they need the rule at all? Many member states would not take even small steps to cut their deficits and debt without EU surveillance. But the rule alone will not save current and future taxpayers from a debt crisis. At best, the rule -- if it is respected -- will only make the crisis less severe.

A better alternative would be for member states to pursue fiscal responsibility without EU control. Where are the brave enough decision-makers to propose big reforms to counter the powerful rent-seeking interest groups, which push for increased government spending?

Socialists openly promote big spending and debt, justifying these policies in the name of social welfare, sustainable development, and other seductive ideas. The sad thing is that even those who do not call themselves socialists promote and implement the same policies. That’s because promising tax-financed benefits is the easy path power. Democratic majorities are happy to vote for irresponsible and destructive policies that conflict with the requirements of sustainable development.

This means that we must question unlimited democracy. Do we really want short-sighted majorities to enslave us and future generations? Unlike unlimited democracy, the liberal democratic idea would not let decision-makers misuse democracy. It stands for individual liberty and therefore limited government. Far from being an abstraction (as many people say), liberalism stands for practical ways to restore power to civil society.

Free-market reforms require that social-welfare programs be cut, pension and health services be denationalized, massive bureaucracies be replaced with small E-government, and dubious public “investments” and subsidies be eliminated. These things produce high taxes and growing debt.

Cutting excessive government spending is the only sustainable way to reduce and eliminate debt and to cut taxes, which hamper the freedom necessary for economic growth and prosperity. In the past, people were angry with a 3 percent tax. Nowadays, many people, although unhappy, will tolerate much higher levels of fiscal coercion.

We must be wary of Keynesian decision-makers who say that GDP goes down when government spending, which is misleadingly included in GDP, goes down. The truth is that government spending takes scarce resources away from entrepreneurs who, guided by market prices, make investments to satisfy free consumers. In contrast, politicians have no good guide to satisfying the welfare of coerced taxpayers.

We cannot expect politicians to provide us with a free society. For that, we look to free-market advocates and intellectual entrepreneurs.

In the meantime, we should do whatever we can to influence policy-makers in a liberal direction. With the EU elections behind us, let’s hope the new European Parliament will focus on its founding value: the single integrated market in which goods, services, capital, and people circulate under clear rules of freedom and competition.

Daniel Hinšt portrait
Daniel Hinšt is president of the Centre for Public Policy and Economic Analysis (CEA) and executive director of the Institute for Development of Individual Liberty (IRIS), representing the Croatian free-market think-tank cluster. Learn More about Daniel Hinšt >