Only In Europe

While skimming the latest draft of the "TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC AND MONETARY UNION" or the EU fiscal draft in short, which is supposed to give Europe reason to rejoice as it says something about the ESM potentially being levered more than €500 billion (not absent additional funding of course, and we have seen how good the EFSF is in procuring capital), we have found the only two clauses worth noting. Which unfortunately show just what a farce this whole process truly is.


For the purposes of this Article, definitions set out in Article 2 of Protocol (No 12) on the excessive deficit procedure annexed to the European Union Treaties shall apply. In addition, "annual structural balance of the general government" refers to the annual cyclically-adjusted balance net of one-off and temporary measures. "Exceptional circumstances" refer to the case of an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as defined in the revised Stability and Growth Pact, provided that the temporary deviation of the Contracting Party concerned does not endanger fiscal sustainability in the medium term.


Article 8 empowers the Court of Justice to verify the transposition of the balanced budget rule at national level. Reflecting the agreement in principle reached by the ad hoc working group, the current draft gives the Court the authority to impose financial sanctions (not exceeding 0.1% of GDP) in case a Contracting Party was found by the Court not to have taken the necessary measures to comply with its judgement.

But hold on, according to Keynesian theory everything that is not in an upward growth trajectory is an Exceptional Circumstance and by definition thus a "temporary measure" as is all the incremental debt needed to bring the system to equilibrium. Remember: voodoo 101, just like the rating agency models, does not accept contraction, and thus deflation, as a stable state, and leads Keynesian economists to immediately #Ref! out.  Thus the trillions in debt injected, and recycled infinitely via a vicious rehypothecation repo loop, at any given moment are merely there to restore prior growth trendlines, regardless of just how ludicrous the imminent mean reversion driven by 30 years of untenably cheap credit is. Like the once we are currently are experiencing.

Said otherwise: the entire fiscal treaty is toothless from the ground up as every breach of deficit targets will always be attributed to "exceptional circumstances." And don't forget - the SMP, or the ECB's sterilized monetization program, which is about to turn 2 years old, was "temporary." As was the Greek reliance on the ECB's Emergency Liquidaty Assistance (ELA) cash, which is now the only thing keeping the Greek banking system from imploding. But fear not - "it's a liqudity, not a solvency issue."

Which brings us to point two: in the impossible event that a country is found to have breached deficits due to non-exceptional circumstances, what does the EU do? Why it punishes the country by making the deficit even bigger, by up to 0.1% of GDP. Because there is nothing like teaching a deficit transgressor a lesson, than by forcing what caused the punshiment in the first place to get even worse...

Only in Europe.