Defending the Deficit

In the recent European Union summit, discussions circulated primarily around hard budget deficit rules and the proposal to introduce a “deficit limit”. For some reason it is generally accepted that  government deficit’s and spiralling government debt levels are the core cause of the sovereign crisis looming over Europe. But is this really true? I believe that the expansion of deficit’s has merely been a response to the crisis and not the cause:

A cross-country comparison would quickly suggest that it was not excessive spending by governments that stimulated the collapse, but instead the deficit’s were the outcome of the huge banking bailouts that took place across all of Europe. The European debt crisis is just as much a banking crisis as a crisis of government debt. Fiscal mismanagement was never the sole cause of the problem but it seems to be the German Chancellors solution. It was after all excessive lending by the banks that lead to the collapse and not excessive spending by the governments (Greece is the exception to the rule).

The best way to reduce debt levels is by growth, something that seems highly unlikely given the EU leaders focus on Deficits – I do not understand how the “3% deficit limit” would assist Europe out of its current situation and prevent a future crisis. And would the rule not be altered if a large Bank in Germany was about to go bust and needed a large capital injection?

I do not see how removing a tool from the governments already limited toolbox is the solution to Europe’s mounting problems. Shouldn’t Europe instead be focusing on growth and tougher oversight of the banking system? Was this not a bank driven recesion? Seems ironic that the ECB are trying to solve this recession by directly improving the balance sheets of the very banks that got us into this mess.