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Balanced Budget Acts as Dumb in Europe as in U.S.: Noah Feldman

August 21, 2011

Aug. 22 (Bloomberg) -- If you think balanced-budget amendments are the stuff of madmen or dreamers, you were in for a surprise this month.

No, not the requirement of the U.S. debt-ceiling agreement that Congress vote up or down on such an amendment -- everyone knows that proposal will be dead on arrival. Rather, it was the joint recommendation of German Chancellor Angela Merkel and French President Nicolas Sarkozy that all 17 euro-area members adopt constitutional amendments by next summer that would require balanced budgets by specific target dates.

In the context of the world’s current economic troubles, how could responsible, economically sophisticated leaders think it is a good idea to impose an inflexible constitutional debt ceiling? Merkel and Sarkozy are, after all, a far cry from Rick Perry.

What makes mainstream politicians imagine that sovereign states would be helped, not harmed, by taking away their option to borrow and spend their way out of a fiscal crisis?

The answer lies in a naive but widespread understanding of how successful constitutions actually operate. The textbooks say that a constitution binds the government in advance so that in the future it will not do something tempting but foolish -- the way Odysseus bound himself to the mast when he knew the sirens would be seducing him. The idea is that a prior commitment will legally prevent later backsliding.

Not a Straitjacket

But the reality is much more complicated. Most constitutional provisions are written with loopholes, either explicit or implicit. A constitution almost never successfully binds the government from doing what it believes it must do to survive. A creative interpretation of the document can generally be found sufficient to enable the government to do what it wants.

Merkel and Sarkozy are well aware of this, so what are they after? First, they want to convince bond markets that poor euro- area members will not drag down the whole system by running up large deficits and then relying on France and Germany to bail them out. They aspire to use constitutions to convey this promise.

If the euro-area members really gave up the sovereign power of deficit spending, they would become much more like the American states. Except for Vermont, all states have balanced- budget amendments or something similar. But the states of the union were not giving up very much when they adopted these amendments. They have never been truly sovereign (not even during the Civil War, when the seceding states immediately formed the Confederacy). They haven’t issued their own currencies in the modern era, and their ability to borrow in the markets is sharply constrained.

This is the model Germany and France are, at the moment, eagerly projecting in their calls for closer economic and political integration within the euro region. Individual constitutional amendments on balanced budgets -- assuming they could really be passed -- would mark the willingness of the members to give up still more of their sovereign control over their economies.

What they would not create, however, is a legal-fiscal straitjacket. Germany is the only euro-area country that already has a constitutional provision governing deficits -- and sure enough, it contains an exception big enough to drive a truck through. Adopted in 2009, Germany’s “golden rule” or “debt brake” requires that by 2016, the federal deficit not exceed 0.35 percent of gross domestic product. But the same provision says that the government “may introduce rules intended to take into account … the effects of market developments that deviate from normal conditions.”

Loopholes All Around

If the German government wanted to escape the confines of its balanced-budget provision, it could easily claim that markets were acting abnormally. Given that Germany is the leader in pressing balanced-budget amendments on the other euro-area members, it is essentially guaranteed that other amendments would contain similar loopholes.

Then there is the problem of getting amendments passed at all. Sarkozy got a golden rule proposal through the first stages of approval in France by relying on his party’s support. But the opposition Socialists are firmly opposed and have the numbers to scuttle the law. Yes, one of the two leading advocates for euro- area-wide balanced-budget amendments is in the embarrassing situation of being unable to pass one at home.

Various European countries have different rules for amendments. But in many of them, observers note, there would be a major parliamentary fight before any such provision could be adopted. Approving a constitutional amendment is by definition harder than passing ordinary legislation.

Perhaps Merkel and Sarkozy believe the short-term benefits of proposing such amendments outweigh the medium-term costs if European parliaments turn out to have a hard time passing them. But if history is any guide, getting all the euro-area members to do the same thing at the same time is a tall order. There are bound to be holdouts and requests for special accommodations.

At most, then, any balanced-budget amendments that are adopted will do nothing more than memorialize agreement among political elites about what they believed to be in their mutual interests at the moment of enactment. It would be telling the markets: “We will try to do things this way. And if we change our minds, we will incur some political costs in publicly changing them.”

One suspects that the markets would understand the limited value of such promises. There is no reason to expect political leaders in Greece or Portugal -- or really anywhere -- would adhere to budget promises should it become clear that doing so will end their careers.

There is nothing exceptional about this. Constitutional commitments are only convincing when they credibly correspond to elite interests over the long haul. If they don’t, then they become what James Madison called “parchment promises” -- not worth the sheepskin they are printed on.

(Noah Feldman, a law professor at Harvard University, is a Bloomberg View columnist. The opinions expressed are his own.)

--Editors: Tobin Harshaw, Stacey Shick

Click on “Send Comment” in sidebar display to send a letter to the editor.

To contact the writer of this article: Noah Feldman in Cambridge, Massachusetts, at noah.feldman@harvard.edu.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.


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