Debt: A measure of EU democracies illness

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of PLC.

Public debt is not just a matter of accounting. The surge it has shown weakens our democratic countries. [Shutterstock]

In discussions over the EU’s next multi-annual budget, EU institutions need to pursue their efforts to decrease the burden of debt, write Cécile Philippe and Diego Sanchez de la Cruz.

Cécile Philippe is the executive director of Institut économique Molinari, and Diego Sanchez de la Cruz is the director of Foro de Regulación Inteligente.

The Commission and the Parliament hope to reach an agreement on the next multiannual financial framework (MFF) in less than a year, the EU’s long-term budget. That would be a record because this budget will have to answer many challenges: a hole of 90 billion euros left by Brexit, new priorities (security, immigration, defence and climate change), disagreements between capitals.

The EU’s expenditures represent currently 1% of the union’s gross annual income and the parliament would like to increase it to 1.3%.

Most EU leaders accepted on 23 February that they will add more funds to the EU budget after 2020. Those are some of the already most indebted countries in the EU such as France, Spain, Finland. This is worrisome because few experts have written about the possible link between populism and public debt.

Populism appears to be threatening the very foundations of our democracies. One possible way to fight it might not be to add more funds to the EU budget that will on most countries financed by debt but, on the contrary, to fight for more balanced budgets in all EU countries.  

Public debt, beyond all explanations justifying it, embodies the amount that public authorities spend without daring to seek the consent of their fellow citizens. If they had this consent, financing it through taxes would have sufficed. Choosing debt amounts to parliamentarians choosing to spend more without their constituents’ prior consent.

Consent to taxation is a foundation of our democracies. Once our political authorities feel they can disregard it by creating debt, they flout this pillar that is a guarantor of peaceful cohabitation.

Consent to taxation is an active component of human cooperation. It symbolises the phenomenon of so-called voluntary servitude described by humanist Etienne de la Boétie. This refers to our consent to abide by legal, conventional or informal constraints with the aim of cooperating peacefully.

The notion of balanced budgets should not be regarded as obsolete, as it lies at the heart of the social pact. That is why we can rejoice the fact that last year the latest Eurostat numbers show that EU central governments, taken together, spent the last of their revenues on the 6th of December, 25 days before the end of the year. Their overall situation continued to improve, with a gain of 7 days compared to last year.

However, much more needs to be done. Despite a substantial decline since 2009, the number of days of unfunded expenditures remained higher than the latest pre-crisis numbers in the 28 member states.

Twenty-four central governments spent all their revenues before the end of the year and only four run a surplus: Cyprus, Germany, Malta, and Sweden. Across the EU, central government overran account for most of the slippage in the public accounts. The other administrations (local governments and social security administrations) all generated surpluses, apart from state governments.

France, Spain, and Romania were at the rear of the pack. France got the most unbalanced position (55 unfunded days, a slight deterioration), followed by Spain (50 days, a slight deterioration) and Romania (48 days, a sharp deterioration).

The French situation can be regarded as a growing source of concern.  This demotion to the last place is due to the inability of the central government to balance its account sustainably following the latest crisis. While European governments overall have used the last seven years to improve their budget balances, this has not been the case in France.

The post-crisis rebalancing of accounts (2009-2013) came to a premature halt four years ago. France’s central government deficit has been back on the rise since 2014, at a pace of one more unfunded day per year, while on average the EU was reducing its deficits by five days per year.

In Spain, following a parliamentary agreement between PP (conservatives) and PSOE (socialists), the country reformed its Constitution in 2011 to introduce a stronger commitment to fiscal responsibility.

One year later, the Rajoy Administration created a Spending Rule that worked successfully with local administrations but was unfortunately not able to significantly improve fiscal performance at the national and regional level. All in all, deficit numbers have come down, but most of the reduction observed in the last four years is explained by record tax revenues originated by strong, 3 percent growth figures.

A spending review program should be put in place to finally make ends meet and put an end to one decade of red ink that made public debt skyrocket from 40 to 100 percent of GDP.

Tomorrows of disillusionment lies in store for those countries that cannot balance their budgets. There is always a moment when the day of reckoning comes. Not surprisingly, citizens are reluctant to pay when the waiter eventually brings the bill, because they did not order anything.

Forced to pay, they feel cheated by their leaders and seek alternatives that reflect their feelings more accurately: their discontent with taxes, their crisis of identity, their mistrust toward foreign creditors, their domestic exile or departure abroad….

Public debt is not just a matter of accounting. The surge it has shown weakens our democratic countries. Like cancer, it has developed over the years, and some of its metastases are called populism. Anyone who places hope in higher public debt underestimates just how much this causes our democracies to rot.

In the 19th century, left-wing parties understood this risk clearly. They defended fiscal balance in the name of protecting the poor of future generations. The capitals definitely need to pursue their efforts to decrease the burden and the Commission and the Parliament should make it a priority of their discussion about the MFF.

There are definitely efforts to be made on all fronts.