Friday, August 17, 2012

Wonk Wars: How Big Are EU Deficits?

by Matthew Dalton

Wall Street Journal

August 16,, 2012

The European Union's official economists believe the U.S. economy is running at close to full capacity, while their counterparts in Washington say it is several years of robust growth away from starting to overheat.

So what? The difference highlights an important trans-Atlantic divide that will shape how budgets are set in the 27-country EU—and especially the 17-nation euro zone—for years to come. It could mean more austerity for Europeans already facing big cutbacks.

Let's backtrack a few months. This past December, as borrowing costs for countries like Italy and Spain were soaring and the euro zone's financial crisis threatened to engulf even France, a core country, most EU leaders agreed on a new treaty designed to stop governments from wayward spending.

The central element of that treaty, known as the fiscal compact, is something called a debt brake. All euro countries must include it in their national laws, ideally in their constitutions. The debt brake is supposed to cap the government "structural" deficit at 0.5% of gross domestic product.


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