Why 3% deficit and 60% public indebtedness as % of GDP are unmovable rules in the Eurozone?

Apparently – after non exhaustive but rather long research – there are no rational explanations / calculations as to the ratios chosen, limits were needed, as of 1974 …

Source of definitionsWikipedia:

The four Eurozone “Convergence” criteria are defined in Article 121 of the Maastricht Treaty establishing the European Community.

They impose the control of inflation, public debt and public deficit, the stability of the exchange rate and the convergence of interest rates.

The appreciation of non-compliance with these criteria was relaxed in March 2005 under pressure from Germany (engaged in the excessive deficit procedure) and France (close to being) , in the justification to hold account the economic situation and structural reforms. Exceeding “exceptional and temporary” is now autorized

The Eurozone convergence criteria stipulate an area not to exceed:

Price stability: inflation rate of a given Member State must not exceed by more than 1.5 points that of the three Member States with the best results in terms of price stability
Public finances:
public deficit (State + social security) Annual less than 3% of GDP
Public debt (all borrowing by the state and the general government, including social security bodies) less than 60% of GDP
Exchange rates: Devaluation excluded (obsolete measure for the countries of the euro area).
Rate of long-term interest: should not exceed more than 2% of those three Member States with the best results in terms of price stability.


– Eurozone:

Why 3% deficit  as a rule?

No real reason, a French (not German…) “invention” – dating back 40 years, no concrete explanations as to how it was calculated.

Why 60% limit to public indebtedness as a rule?

Ditto – Deficit…

– US, similar size than the Eurozone, has no preset rules…

The FED establishes “guidance”…, no “real” Ministry of Economy exists in the US, “only” – and formally, the Secretary of Finance, very related to the FED…

Sticking now to the Eurozone:

As is being widely discussed these last months, and exponentially increased since the new “Greek Crisis”, austerity should be abandoned – a big statement by most large and less large Eurozone countries except Germany, Finland, Austria (to some extent).

Austerity to be abandoned in a country like France, second biggest  economy  in the Eurozone, a country which never exercised “austerity”, but was and is champion in all kinds of  tax increases – is that any better?

France was the country which first “invited” the new Greek left radical and populist government to “visit” when the new Greek Government started their blitz European tour, and France was also the first Eurozone country who commented favorably on the so called “agreement” (sic), which is not one – please refer to my latest post (of a long daily “series”)  today – on Greece: “Greece will not be exited from EZ due to political and inertia reasons – my summary opinion”.

Austerity is not a “bad” word, it imposes itself when people or countries live above their means and need to remediate itself, most people cannot incur debt debt for ever to “remediate”, countries apparently can.

The US is 100% indebted as % of GDP, so will be the case with the Eurozone, who is at 95% plus currently (Greece at 175 / 180%, Italy at 135 / 140%).

The US is “doing well” apparently (except for too high underemployment), the Eurozone is doing badly (with close to  double total unemployment than the US), US’ GDP grew by 2.4% in 2014 , Eurozone by 0.8% – 3 times less.

Accordingly, to all these non austerity countries the fault of limited growth is “austerity”, and indebtedness will continue increasing thanks to ECB’s QE, which will allow (if implemented as they declared?) for more relaxation, since interest rates will be low and in case of need the ECB will “provide” with printed money, like the FED did in the US during the (not finished) crisis.

The problem  is with Eurozone’s Governance, which – mil repetita in this blog – is non existent.

Germany acted as “de facto” leader by default, and as repeatedly commented in my blog cannot direct, and should not continue doing so, the Eurozone, because its style is basically disciplinarian and constitutional, and  does not adapt to the “rest” of the Eurozone.

Both the European Commission / European Union – and Germany – did the fatal mistake of not differentiating sufficiently between “pure austerity” – i.e. tax increases, lowering of salaries and pensions, etc…, which is “bad” austerity, and social-economic structural reforms, which were only very partially implemented in some countries, but far from being sufficient, and not implemented in the two largest economies after Germany – France and Italy (the first making a great deal of “noise” with very fragmented reforms which are far from attacking the big and real reasons for lack of productivity of the country, the latter, with  Prime Minister Renzi  – one year in power only – at least trying, with great political difficulty, to start making “real” structural reforms).

Is the absence of structural reforms in most Eurozone countries the main reason for the difference in performance with the US, who is not exactly a “model” either, not  having made some very necessary structural reforms, but still has done far more than the Eurozone, and being “one country”, and not a “messy mosaic ” of 19 countries, can do more, even within a very divided political “home” situation.

The crux of the situation is that US corporations are far more innovative and start by being able to enter a huge “common” home market, which is not the case with the Eurozone, where there are no “Unions – be it financial, economic, political, the decision making process being not existent.

How to remediate?

By changing the whole approach of Eurozone Governance.

Please refer to my books – published by Amazon (e-book and paper version): mid-September 2014:“Why Macro Governance is Obsolete and killing the Economy”, and to be published in April 2015: “Growth through Structural Reforms”, books I wrote, because blogs’ posts become very repetitive if you are somewhat coherent and follow a “line”…