Automatic fines are a SAD Eurozone policy

Jamie Whyte
THE cold war policy of mutual assured destruction stuck many people as mad. If the Soviet Union was wicked and foolish enough to launch a nuclear attack on the United States, killing millions of innocent Americans and plunging the planet into a nuclear winter, it would be crazy to compound this wickedness with a retaliatory strike. Yet that is precisely what US governments promised to do.

The policy was not really mad. It aimed not at mutual destruction but at avoiding any use of nuclear weapons. Its purpose was deterrence. To work, the threat had to be credible; the Soviets had to believe that the Americans really were crazy enough to retaliate even when all was already lost.

Though never achieved, the best way to signal this would have been to establish an automatic mechanism for retaliation, requiring no human judgement, that was triggered by a Soviet nuclear strike. (In Stanley Kubrick’s cold war satire Dr Strangelove, the “Russkies” build such a doomsday machine but forget to tell the Americans about it.)

The threat of nuclear war has receded. Today, it is an economic winter that threatens us. But deterrence is still an important part of the plan for avoiding it. The Stability and Growth Pact, to which all member nations of the euro are signatories, threatens them with large fines should they run deficits greater than 3 per cent of GDP or accumulate government debt in excess of 60 per cent of GDP.

This threat did not deter any Eurozone government from exceeding these limits. They probably suspected that, when they got in trouble, no one would be crazy enough to compound their economic woes by imposing a fine on them. And, as it has turned out, they were right. So President Nicolas Sarkozy and Chancellor Angela Merkel, both old enough to have enjoyed Dr Strangelove, now propose that the penalties be imposed “automatically”.

Never mind the implausibility of Sarkozy, Merkel or anyone else designing a fine-imposing automaton that will obviate the need for any human decisions in the matter. Suppose fines really could be imposed automatically. The policy is still lunacy.

Ask first why one country in the Eurozone, such as Germany, should wish another, such as Greece, to keep its debt levels low. The Germans must fear that they will end up repaying Greek debt if the Greeks cannot do so themselves; Germans must believe themselves to be guarantors of Greek debt. If so, the Greeks will be unconstrained in their borrowing, and the Germans will pay the price. Hence the need for a deterrent.

Yet a fine cannot possibly deter Greek borrowing. The fine will simply become an addition to Greek debt and the Germans will end up paying it themselves. If you promise to pay someone’s debts, you cannot effectively threaten him with fines, automatic of not.

And, if you do not propose to pay someone’s debts, then you should not threaten him with penalties for borrowing too much, because doing so can only suggest to him that you do not mean it. If you are not, in the end, going to pay his bills, why do you care how much he borrows? Your threat is an implicit guarantee.

Despite its bad press and unfortunate acronym, mutual assured destruction was an effective way of preventing nuclear war. Merkel’s and Sarkozy’s “automatic fines” are a policy of self assured destruction, which fully deserves its acronym.

Jamie Whyte is a senior fellow of the Cobden Centre.