ISPI - Policy Brief
are estimated to account for aquarter of the forecastincrease in public deficit ratio(from 7.2% in 2009 to theimpressive 13% in 2010).Obviously, this needs to beread as the attempt of theBritish government tocounterbalance its modestwelfare state (and the ensuingincome squeeze for itscitizens during the crisis) withnew measures of publicspending. This will also leadto an unprecedented increasein the UK debt ratio from 66%in 2008 to about 79% by2010.The situation is rather differentin continental Europe. In thiscase, a strong welfare statealready exists and automaticstabilisers – including unemploy-ment benefits (such asredundancy funds, mobilityallowances, solidarity contracts,etc.) – are working at fullspeed, even if mechanisms,amounts and timing differ foreach country. As a result, thetrend of private consumptionsis not expected to be negativein France (+0.2% in 2009 and+0.3% in 2010), while amodest reduction is foreseenin Germany (-0.5% in 2009and -0.7% in 2010). Thisimplies a minor need forincreased public consumptionand fiscal stimulus (ifcompared with the UK) withlower pressures on publicaccounts. The French budgetdeficit is projected to rise to6.5% in 2009 and to 7% in2010, while Germany willreach 4% and 6%,respectively, in the next twoyears. These figures aredefinitely above the limits ofthe Stability and Growth Pact(SGP) but they look low ifcompared with the skyrocketedBritish data.The differences betweenGermany and France stemfrom the main source of theGDP fall: foreign balance(60%) for the export-orientedGermany and stockbuilding(40%) for France (the foreignbalance contributing for 33%)in 2009
.Therefore, the continentalmodel seems to prevail in thewake of a crisis as it can relyon existing safety-nets thatmake the burden less painfulfor citizens.On the political side, onecould easily predict thatpeople will clearly perceivethe potential superiority (andadvantages) of this model andtend to favour and vote forparties supporting it. As aresult, the policy recom-mendation for the UK wouldnot be simply to increase thesize of the State by spendingmore but to improve thequality of the State interventionby spending better throughconstant and efficientinvestments (as the Frenchhealth system demonstrates).But in doing so, we are notcertainly making a newdiscovery in economics. It hasalways been clear that theAnglo-Saxon model wins intimes of growth but it makesthe social impact of the crisisharder. Conversely, thecontinental model hampersgrowth potentials but makesthe crisis less painful and itsexit smoother.One should also note that thesystemic nature of the current
Calculations by the authors ondata provided by the
Economic forecasts - Spring 2009
, EuropeanCommission, Directorate-Generalfor Economic and Financial Affairs,March 2009.
crisis is contributing to em-phasize the positive aspects ofthe continental model. Not-withstanding the unevensocial impact, the presence ofa symmetric external shock(as the crisis is hitting all theEuropean countries) allowedthe Council to ease theMaastricht criteria with norelevant complaint by memberStates. But in case of anasymmetric shock (hitting aState or group of States)governments would berequired to get a specialexemption from the EU (alsounder the revised SGP) toovershoot the 3% deficitcriterion (and, in any case,respecting precise and narrowlimits)
. This would inevitablyreduce the available optionsof a single government and,ultimately, limit the benefits ofthe continental model sinceautomatic stabilisers wouldnot be allowed to work fullyand no transfer fromEuropean funds could beforeseen.In sum, the debate over thebest model of economicdevelopment is anything butnew. Also today’s crisis isstressing benefits and
In 2005 the Council has redefinedthe exception foreseen in TEC, art.104, par. 2a: any (temporary)excess over the reference valuewhich results from a period ofnegative growth rate (thus nolonger a recession of at least 2 percent, or 0.75 per cent), or evenfrom the accumulated loss ofoutput during a protracted period ofvery low growth relative to potentialgrowth, should be considered asexceptional, and therefore notsanctioned. See C. ALTOMONTE
EU Fiscal Policy in the Age of Turbulence: will the Lisbon Strategy Survive It?
, in C. SECCHI- A. VILLAFRANCA (eds.), cit., p.134.