Sir,

Edmond Alphandéry’s article did much to enhance the quality of the debate on how to improve fiscal consolidation, which remains a top priority in the EU agenda, despite recent changes in the rules of the Stability and Growth Pact (SGP).

 

One can reasonably expect that this “new” SGP, combined with the “experience curve” of the Ecofin surveillance, will from now on at least prevent another major flaw such as the Commission’s “benign neglect” in the 1997-2000 expansionary cycle that permitted a number of eurozone founder members to run lax fiscal policies.

 

But as Mr Alphandéry points out, so long as penalty procedures remain inoperable, that will not be enough to prevent governments of “sinner countries” to continue free riding on eurozone credibility while avoiding the electoral costs of its fiscal discipline.

 

And as this is the source of their resistance to change, his suggestion that Brussels should try to persuade them to show even greater fiscal discipline by emphasising the fruits they could reap in terms of growth and job creation does not seem very promising.

 

Rather than betting on these national government’s ignorance in such matters (which remains to be proved), it would be preferable to strengthen implementation of the present SGP rules by including in the national programmes more refined and detailed targets to be achieved by individual eurozone countries. And it is on this point that I would like to offer a suggestion. Excessive public expenditure is invariably the root of lax fiscal policies and usually takes two basic forms – over-production by the state and excessive bureaucracy. Specific measures to trim bureaucracy can readily be defined, and several EU countries (notably the Netherlands) are already implementing well quantified programmes to reduce red tape sharply.

 

Cutting excessive state production of goods and services is more difficult, mostly because of ideological prejudice. However, a simple but powerful criterion is available – the opportunity cost concept. In each country, standard cost benefit analysis based on this concept can evaluate whether the state or the private sector performs better, across a range of good and services, and the allocation of resources should migrate accordingly, thus raising the productivity in both sectors and the overall efficiency of the economy.

 

On average, the net effect would be to shrink the EU ratio of public expenditure to GDP, while maintaining wide national differences in the role and the economic dimension of the state sector (particularly in healthcare, education, infrastructures and social services). But the value for money of this exercise would be that state failures as well as market failures should be sharply reduced. In similar vein, national programmes should also target quantifiable reductions in the ratio of public expenditure to GDP, as well as changes in its composition so as to achieve higher rates of growth and create more jobs.