“Early warning” gets pigeonholed – sign of weakness

“Early warning” gets pigeonholed – sign of weakness

Anyone who shows the yellow card but then retracts it is a referee who risks losing respect. A player who threatens the referee, or simply engages him in discussion, has not grasped his role.

When a country that invented and hammered home the rules of the EU’s stability pact resorts to political pressure to pigeonhole the warning that it is in danger of missing its targets, it does no service to the instrument, or the European institutions. But most important of all: it inflicts damage on itself.

In any event, it cannot be ruled out that the political jockeying may ultimately also weigh on the euro’s standing. The financial market players are only going to ask: what will happen if a euro-zone country actually does violate the stability criteria? If the Council does not follow the Commission’s recommendation on the relatively simple decision about a formal warning, will it impose sanctions if the Maastricht target criteria are really missed?

It would have been to everyone’s good if Brussels had sent the warning and Berlin received the censure and accepted it. However, the face-saving compromise is not entirely irrelevant. If the Berlin government were to fail to toe the fiscal line agreed now – a balanced budget by 2004 – once again, then all parties involved would have egg on their face. And what they agreed is pretty demanding: either unexpected growth will have to produce a budget miracle, or the finance minister will have to knot the purse strings on all three levels of government in Germany for two years as of September 23. Are all involved – including those hoping to oust the present government – aware of this?

It might have been more appropriate to discuss the matter in a European context: first, which countries are currently able to provide fiscal help to pull the European economy out of the mire without infringing the stability pact. And second, someone ought to have checked into whether it might not have been better to set cyclically adjusted budget deficits as the basis for the stability pact instead of actual deficits. While I clearly prefer such a more subtle concept, I am aware: Politics and the financial markets prefer to count on a sledgehammer rather than a complicated theoretical concept!

Norbert Walteris chief economist of Deutsche Bank Group.

For more analyses by Mr Walter, see

‘Walter’s Web Wisdom’.