Thread by @AshokaMody

@pierremoscovici says there is no special treatment of France over budget rules. thelocal.it/20181212/eu-te….

Not true. Clear bias in France's favor. In the short-term the French and original Italian plans are similar, but long-term implications are worse for France. 1/8.

In both cases, additional spending will be stimulative short-term, and because it is directed towards those likely to immediately spend it, it is potentially high impact stimulus. The French version, which has been slapped together, has less coherence than the Italian plan. 2/8.

Long-term: France has lower debt-to-GDP, about 96% of GDP, Italy 131%. That said, state of French public finances is arguably worse: public expenditure 56% of GDP (Italy 48%); primary deficit 1% of GDP (Italy 1.5% surplus). Thus, Italy has shown more fiscal discipline. 3/8.

Outlook for France is worse—France has kept debt low despite more profligate ways because growth has been superior to Italy’s. But French growth potential has fallen significantly since the crisis. Hence, laxer public finances will show up more prominently in debt burden. 4/8.

Giveaways to appease the yellow vests were necessary given Macron’s trickle-down growth strategy has not worked—and is not likely to work. However, this follows old French pattern. Temporary social fixes become entrenched entitlements, public anxiety remains undiminished. 5/8.

Eurozone fiscal rules come out in shambles--stupid because they deny the need for stimulus in recessionary conditions and arbitrary in their application based on prejudices. And, if true, that the agreed deficit with Italy is 2.04%, that is pathetic--why not 2.004 or 2.0004? 6/8.

Worse, while the French are off the hook, Italian saga is set to go on. wsj.com/articles/italy….
The accompanying narrative will keep up pressure on Italian government yields, set to rise in any case with QE withdrawal. Ultimately, all will pay for short-sightedness. 7/8.

Trust eurozone authorities to make bad situation worse. Inadequate stimulus for Italy. Display of "technocratic-authoritarianism" in Fritz Scharpf's words. Arbitrariness engenders divisions. Pressures building up—no obvious sense that anyone has a strategy to unwind them. 8/8.