Twenty five European countries – a part UK and Czech Republic - have approved the fiscal compact rules (and 17 euro countries the ESM fund). In short, there are two rules in the fiscal compact:
i) structural balanced budget (a part from cyclical components), with a maximum of 0,5% deficit allowed;
ii) annual reduction of 1/20 with respect to the debt ratio exceeding 60%.

Now the point is that the respect of the first rule implies, in normal times, also the respect of the second one. It is sufficient that the nominal growth of GDP is at 2%-2,5%, and this is a condition easily satisfied, a part in recessions. But when there is a recession the rules are suspended (even if there some fog on this point; but a recession is a “severe economic downturn”).

If EU Counsel (i.e. German objective) wants a continuous reduction of the debt ratio until 60%, the balancing of the budget is non-necessary. Francois Hollande presented his programme where, starting with a deficit of 4,5% and a debt of 88,7% in 2012, the deficit is cut at 3% in 2013, and then is reduced slowly until reaching zero in 2017 (last year of the legislature). Assuming that the real economic growth will rise from 0,5% in 2012 to 2,5% in 2015 (and following years), the result will be a debt ratio of 80,2% in 2017. According the second rule (1/20 cut) the debt ratio in 2017 should be two points higher: 82,2%.

Hollande’s programme forecasts a decrease of total public expenditures by 2,6 points (from 56,5% to 53,9%), due to the economic growth, but there will be 60.000 more teachers and subsidies to PMI and research sector, and to enterprises employing a young worker without firing and older one. The fiscal burden will increase by 1,8 points (from 45,1% to 46,9%), mainly in 2013, in order to reach the 3% of deficit of Maastricht excess deficit rules.  The taxes increase fall mainly on banks and big enterprises, and also on top revenues.  The programme is considered, not only in US, as a typical socialist programme, even if the 41,5 years of contributions necessary for retirement obtained a bad reception from trade unions. But the retirement year remain at 60, which would be the lower age of retirement in Europe.

The crucial point is the 2,5% of real growth from 2015 onward. With all Mediterranean countries forced to balance the budget, in order to calm down financial markets, and Germany and northern countries willing to balance because of an obsessive financial orthodoxy, the chances of a fast recovery from the present stagnation (and even recession in some countries) are very few.

Italy is a point in case: a real rate of growth of 2 points, and an average cost of debt of 4,5% would imply a primary surplus of 3,5%, but one point less of growth and one point more of debt cost push the primary surplus over 6%, for the next ten years. That is a typical “mission impossible”. 

Once upon a time the “golden rule” was limited to balancing the current account, while public investments were financed, in great part, by debt. Hollande’s victory in France would be an important step to put a “parce sepulto” on the fiscal compact, but the deciding elections will be on 2013 in Germany.