Fiscal compact bans future borrowing - so why would default be worse?

[feargach]

One of the rules of the new fiscal compact is that borrowing will be limited to 0.5% of GDP in future. A sum so pathetic that it cannot have any serious power to allow investment.

(Follows an example for illustrative purpose only. Individual borrowers are not affected by the fiscal compact.) Take a median earner with take-home pay of €20,000 a year. The fiscal compact (if it applied to individuals, which, in case you don't follow this stuff, it doesn't, this is an illustration, not a worked example) would limit his annual borrowing to a max of €100 a year. Not enough to buy most flights even on a no-frills carrier.

Now the whole reason states try not to default is to keep open the option of being able to get credit in the future.

But seeing as we are voluntarily going to rule out ever borrowing any non-trifling sum ever again, who cares if we are banned from borrowing?

Everybody says that Argentina's big problem is that it's shut out of capital markets because of its default ten years ago. but if it had signed up to this fiscal compact, that would be irrelevant: they couldn't borrow more than a few hundred million a year under its terms.

So if we sign up to this compact, what's the incentive for any EU nation to continue paying its existing national debt? Just default, as save all the costly repayments. Can't borrow any more as a result? Who cares! The trifling amount you were allowed to borrow is more than compensated for by the huge repayments you no longer need to make.

I'm not actively advocating a default, BTW, just trying to get the logic of this insane fiscal compact.

[drummed]

Where did the concept of living within our means ever go?

[bob3367]

How does .5% of GDP affect a individual?

GDP is about €160bn, so are you saying that €8bn will the total amount that the government is allowed to borrow, or the economy as a whole.

Could you also link to that part of the treaty that says this....

[feargach]

Where did the concept of living within our means ever go?

It died with feudalism.

Your great-great-great grandfather lived in a world which was run and developed by credit rather than countries living within their means.

You seem to be nostalgic for some kind of historical period where credit wasn't how important things were done.

But unless you are over 300 years old, you have no memory of any such time.

[feargach]

How does .5% of GDP affect a individual?

GDP is about €160bn, so are you saying that €8bn will the total amount that the government is allowed to borrow, or the economy as a whole.

Could you also link to that part of the treaty that says this....

Why are you asking about individuals, the example I gave was simply an illustration.

Yes, €8bn would be the theoretical total IIRC.

There's not really a "part" of the compact that says it: the 0.5% limit is the compact. It's like asking what part of football is about kicking the ball.

[Edo]

Good article in the times today

Fiscal compact a welcome control of wild public debt - The Irish Times - Tue, Feb 07, 2012

..............Rather, the first line of defence in ensuring fiscal discipline should be domestic in nature, with the domestic fiscal law tying the hands of governments by requiring that public debt converge to a prudently low level and providing that average fiscal balances are sufficiently low so as to enable fiscal deficits to safely emerge during recessions by running sufficiently large surpluses during boom periods.............................

it seems eminently sensible to encourage governments to save rather than spend during doom times ( supernormal tax receipts) to compensate for the inevitable downturn in the economic cycle.

Ireland ran balanced budgets from the foundation of the state until the 1960s

Also there is major difference between capita borrowing and current account borrowing (for day to day expenses) - addiction to the latter is what has Greeks, the Portugese an us to a lesser extent in the big pile of poo.

[bob3367]

Why are you asking about individuals, the example I gave was simply an illustration.

Yes, €8bn would be the theoretical total IIRC.

There's not really a "part" of the compact that says it: the 0.5% limit is the compact. It's like asking what part of football is about kicking the ball.

You used it to spell misinformation amoungst the readers, are you now saying its of no relevance....

Tabloid journalism, and bad tabloid journalism at that....

[feargach]

I'm just saying, once meaningful borrowing has stopped, why wouldn't indebted countries simply quit repaying in droves?

Think of the hypothetical individual middle-class guy who has limited himself to borrowing nothing more than €100 a year.

Imagine he has a €600 mortgage payment to make every month. Imagine he could default on that payment without any further consequences (like a country can). He could save himself the €7200 per year, and only have to sacrifice the ability to borrow €100.

In Ireland's case, we could choose to simply cancel our €200bn - odd national debt. Our punishment - no longer allowed to borrow €8bn a year.

Talk about a lopsided incentive!

[seabhcan]

8bln is 20 pc of tax take. Its not nothing. Also, the .5pc limit excludes borrowing for capital investment.

[feargach]

You used it to spell misinformation amoungst the readers,

Okay, for the benefit of anyone else as dim as you, I've edited it to make it sufficiently obvious.