The news that the EU plans to temporarily ease fiscal rules in order to allow for greater defence spending is an unwelcome answer to an existential question (Report, February 15). More money for security is very necessary — perhaps more so than for decades — but so too is financial sustainability. This would certainly not provide the latter, nor, in the longer term, the former.
Europe is already heavily indebted, and as its relative share of global GDP has fallen — without a commensurate reduction in global spending — it has only become more so. Nor does this trend show any sign of changing. The rules imposed to give investors confidence in the longer-term fiscal rectitude of governments have already been changed several times. Doing so yet again, to allow for even more debt, will bring them further into disrepute. One can only mark one’s own homework for so long before teacher demands to take a look.
Carry on down this path and economic credibility is damaged; damage it too far and that money will dry up. However, there is a way to both raise the necessary finance and reassure investors. The answer is to issue amortising securities. Provided these securities were long-dated, the cost of the amortisation would be financially containable, and equally importantly, a credible pathway to debt reduction would be established. The world is currently a more dangerous place than it has been for some time. We urgently need to raise money to ensure we can defend ourselves. But we cannot do that at the expense of fiscal credibility — since without that, we will not be able to do it at all.
James Sproule
Chief Economist — UK
Handelsbanken, London E1, UK
