Facing reality – A weakened Stability Pact is a blow to an ‘ever’ closer Union

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

The article assesses the wider political fallout from the ongoing debate on the future of the Stability and Growth Pact.

Facing reality – A weakened Stability Pact is a blow to an ‘ever’ closer Union

The de facto suspension of the euro Stability and Growth Pact, following the refusal of euroland finance ministers to back proposals by the Commission to require the French and German governments to take tougher action to stay within their permitted budget deficit limits, leaves the Pact severely wounded. The conflict in the heart of the single currency pact may also have a wider negative political impact, since it threatens to undermine the credibility of the important leadership role France and Germany continue to play in driving forward the wider process of European integration.

The euro Stability and Growth Pact is not dead. Indeed, in spite of the thoroughly unsatisfactory outcome to the all-night meeting of the euro ministers in Brussels this week, the Pact has demonstrated its great value. Neither Berlin nor Paris would have taken the difficult – if limited – measures they have already adopted to tackle their excessive deficits without the existence of the Pact and its disciplinary rules. But once successfully defied it will be more difficult in future to ensure that its authority is respected by others. Meanwhile what happens now if both countries find they are still outside the prescribed budget deficit limits not only next year but also in 2005?

The Commission and the small Member States of the euro zone are entitled to feel aggrieved. “The commission deeply regrets that these proposals do not follow the spirit of the Stability and Growth Pact,” Monetary Affairs Commissioner Pedro Solbes said with justification after an ill-tempered nine-hour meeting of finance ministers on Tuesday morning. It may even be that the Commission will decide to test the legality of the ministers’ conclusions before the European Court.

Meanwhile governments in some of the smaller euroland states are hopping mad that – thanks to the tolerance of excessive deficits shown to Germany and France (but not to some of them in the past) – they may end up having to accept higher future interest rates in the entire euro zone because of the fiscal irresponsibility shown in Paris and Berlin.

The importance of rules

Rules are there to be observed. Nowhere is this more vital than in the field of economic policy particularly in a multi-nation monetary union which depends on all – especially the biggest participants – playing fair. No one should minimize the extraordinary political difficulty in which both the French and the German governments have found themselves in confronting the urgent need to bring their respective budget deficits under the 3% of GDP limit set out in the Pact. Indeed both governments have shown some considerable political courage in taking the steps they have in an incomplete effort to reverse the relentless upward trend in their budget deficits.

Too little, too late?

But the fact of the matter is that far less traumatic measures would have been necessary now, if more determined action had been taken in Paris and Berlin a few years ago to cut deficits when relatively rapid rates of economic growth flattered the budget situation in a misleading fashion. The right action during the good times would have created far more leeway to absorb the malign budgetary consequences of slow growth during the hard times.

That all said, the time has come to ask whether the Stability and Growth Pact has evolved in a satisfactory manner to meet the new – and largely unpredicted – changes in the economic environment within which the euro must function? In the past year a number of improvements in the functioning of the Pact have been suggested and some even agreed. Greater account should be taken of the trend of deficits over the entire business cycle. Most experts accept that keepin g debt to GDP ratios at a healthy level may be more important in the long run than excessive budget deficits are in the short run.

 

Subscribe to our newsletters

Subscribe

Want to know what's going on in the EU Capitals daily? Subscribe now to our new 9am newsletter.