Transatlantic Effort to Impose Fiscal Restraint

American and European conservatives push for balanced budget amendments, hoping to force their governments to cut spending.

Conservatives on both sides of the Atlantic are pushing for legal changes that would force their governments to pass balanced budgets instead of running the sort of high deficits that have become the norm since 2008’s financial crisis and subsequent economic contraction. In Europe, enshrining deficit limits in national constitutions might even become a condition for remaining part of the continent’s single currency area.

Western governments have borrowed heavily to finance deficit spending in recent years. Although austerity appears to be in vogue in Europe, even countries that are implementing deep budget cuts are unlikely to achieve balance for at least two more years.

Fiscal consolidation is a short-term goal in many European countries nonetheless, especially after financial markets started to worry about the creditworthiness of Italy and Spain last week and drove up their borrowing costs. The European Central Bank intervened with a bond purchasing operation to provide temporary relief but its president Jean-Claude Trichet has warned that “monetary policy responsibility cannot,” in the long term, “substitute for government irresponsibility.” Countries have to slash spending, fast.

France and Italy both announced additional austerity measures last week, including tens of billions of euros in cutbacks. Italy, which is the third largest economy in the eurozone, could be especially vulnerable as its public debt equals some 120 percent of gross domestic product.

In the United States, by contrast, where the national debt almost equals the size of the economy, the administration is reluctant to scale back public investments. Indeed, President Barack Obama and his Democratic Party insist that more stimulus is needed to propel the economy into recovery.

The American government currently borrows approximately a third of what it spends, amounting to a deficit of nearly 10 percent of GDP. Shortfalls are projected for several more years, necessitating several trillions in spending reductions over the next decade if the country is to achieve balance in the medium term.

Opposition Republicans, who control the lower chamber of Congress, have passed a comprehensive “cut, cap and balance” plan for fiscal consolidation that cuts federal spending immediately, caps it at a certain measure of GDP and legally prohibits future deficit spending with a balanced budget amendment. The Democratic majority in the Senate rejected the proposal as did the president.

“We don’t need a constitutional amendment to do our jobs,” Obama explained last month, which is “to make sure that the government is living within its means.” He has yet to present a credible plan for deficit reduction however. His 2012 budget proposal included just $100 billion in yearly cuts, trillions short of the amount that independent experts and the Congressional Budget Office estimate is necessary to eventually regain balance.

A balanced budget amendments is popular with American voters. Nearly all the states already have such provisions in place.

European politicians are exploring similar methods to force especially countries in the periphery like Greece to rein in spending. French president Nicolas Sarkozy and German chancellor Angela Merkel said on Tuesday that they would push other eurozone governments to enshrine deficit limits in their constitutions. Sarkozy advocates such a measure at home although his socialist opposition is skeptical. One leftist presidential contender has suggested that the conservative first aim to achieve his 3 percent deficit target for 2013 before considering constitutional reform.

Germany enacted a balanced budget provision in the wake of the financial crisis in 2009 which limited its government’s yearly ability to borrow to .35 percent of GDP, starting in 2016. From 2020 onward, the German states will not be permitted to run a deficit at all except during emergencies.

The countries most desperately in need of fiscal reform are Greece and Spain where socialists governments have been unable to reduce spending enough to meet the European deficit maximum of 3 percent of GDP. Both had a 10 percent shortfall last year and each had their credit ratings downgraded, stirring market apprehension about the indebtedness of countries like Belgium and Italy which were previously deemed safe. Imposing deficit limits on governments throughout the eurozone should assure investors that countries will not be permitted to continue to pile on debt.