Letter to European Commission President

Dear Mr. President,

I have been Reading the Alert Mechanism Report 2015 prepared by the Commission and I have reviewed your MIP Scoreboards in the statistical annex with interest. Several inconsistencies caught my attention. If I am reading correctly, you are expecting all countries to meet the following constraints:

·         The three-year average of the current account balance as a percentage of GDP should remain within the boundaries of -4% and +6%.

·         Private sector debt as a percentage of GDP should be less than 133%.

·         Private sector credit flow as a percentage of GDP, consolidated, should be less than 14% of GDP.

·         General Government Sector Debt as a percentage of GDP should be less than 60%.

The following macroeconomic identity always holds true:

(S-I)+(T-G)=(X-M), where

S=Savings of the private sector,

I=Private sector investment,

T=Tax revenues,

G=Government spending,

X=Exports of Goods and services,

M=Imports of Goods and Services.

or, put in words, the net private sector savings less investment plus the government surplus/deficit is equal to the current account balance.

In the case of Spain, you expect the private sector debt and the government sector debt to fall simultaneously below the aforementioned thresholds. This implies that you are requiring (I-C)+(T-G)>0, so, by definition, the current account balance (X-M) should be markedly positive. It puzzles me that in your scoreboard you are not then requiring a current account balance as a percentage of GDP that is greater than, say +3%. Surprisingly, for Spain, you seem to consider that her small current account deficit meets the thresholds, which is inconsistent with the desired private and government debt reductions.

In the case of Germany, you seem to consider that the Government sector debt is a problem. If the goal is to obtain a public surplus [ (T-G)>0 ] logically it follows that, either the private sector reduces their current savings  (S-I) <0, or the country must generate an even higher current account surplus. However, 1) you set no goal for an increase in private sector debt and 2) your scoreboard marks the German current account surplus as an imbalance, in other words, you are requiring the country to, slightly reduce her surplus. Would it not be more consistent to set a target for S-I, in other words, require a reduction in German private net savings so that the desired Government surplus does not accompany an even greater current account surplus?

Finally, given that for Spain X-M should be strongly positive so that the private and public debts decrease, how is that supposed to happen, if simultaneously you do not require other countries with strong current account surpluses to reduce them?

By requiring all European countries to meet the same goals simultaneously, it would appear that you are trying to square the circle. You should adjust the scoreboards to each country’s situations and take a more holistic approach by considering, not only internal imbalances, but also imbalances amongst the different member countries. You could build a more consistent scoreboard in a fashion such as the one following:

Germany	Spain
(S-I)<0	(S-I)>0
(T-G)<0	(T-G)>0
(X-M)<0	(X-M)>0

There would be another way of getting closer to meet the thresholds:  letting the denominator, GDP, grow. That implies creating jobs and allowing Governments to spend. But your thresholds are inconsistent with the goal of creating full employment. In fact, it is obvious that the EU has no full employment goal since a 3-year average of 10% seems to be your unambitious target. It is a tragedy for the population of Europe that a useless goal, such as reducing government debt in Germany, is a more important goal than creating jobs.

Sincerely,
Stuart Medina