France and Germany want the stability and growth pact hurdle to move to zero percent by 2016

According to Spanish website Cinco Dias, France and Germany want to move from a 3% deficit target to balanced budget by the year 2016. The website said France is working with Germany to propose a deal which will include a balanced budgets and deficit limit in national constitutions along with additional facets to ensure supranational fiscal solidarity. This aim points to a clear intention by the two countries to present a deal on fiscal integration and priorities in the coming days.

My translation of Cinco Dias is as follows:

the French Minister of Budget, Public Accounts and State Reform, Valérie Pécresse, has confirmed that France and Germany are working on a revision of Europe’s Stability and Growth Pact with the aim of giving "greater discipline to the euro area" which includes the obligation to reach a zero deficit in 2016.

In an interview with French television channel France 2 collected by the French press, Pécresse stressed that all euro area countries should impose a zero deficit target."The golden rule is to return to balance in 2016," said the minister.

Note that an adjustment to balanced budgets throughout the euro zone would require either an exactly equivalent offset in private sector savings down and/or in the export sector up. So implicitly, Germany and France are calling for a rapid and massive private sector dissaving and/or reduction in the external value of the euro area currency. I see this as a pipe dream. More likely, the cuts in the public sector will lead to a deflationary spiral via bank balance sheet deleveraging. This proposal tells you that bad things are definitely going to happen in Euroland.

Source: Francia adelanta que el pacto de estabilidad exigirá déficit cero en 2016 – Cinco Dias


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.