In the context of the Stability and Growth Pact reform deal, CEPS economists argue that “it does not bode well for the future of Europe when two Euroland heavyweights (France and Germany) whose economies were supposed to be the motors of European integration have become its main brake”.
Three members of a Centre for European Policy Studies macroeconomic policy group argue that the Stability and Growth Pact reform deal agreed by governments has been “emasculated”.
The ECB has been patient by keeping rates at historically low levels and allowing liquidity to expand beyond the level considered consistent with long-term price stability. It has allowed eurozone governments a window of opportunity in which to enact serious reforms but now the economists argue that “the credibility of governments has collapsed” and that “the ECB must assert itself as the last guardian of macroeconomic stability in the euro zone”.
They note that “the immediate market reaction to the emasculation of the Stability Pact was muted, but the long-term trends are disquieting” and that “a recent study by a major rating agency shows that under current trends all three major eurozone governments will sooner or later face junk status”. Junk status refers to a credit rating of CCC or below and means that institutional investors are not able to put the given bond in their portfolio.
Gros, Mayer and Ubide say that the three governments are now effectively saying that they wish to be free to do even less fiscal adjustment than they have undertaken so far.
Noting the widespread criticism that “the pact should ideally foster adjustment in good times, and countries with high debt levels should be even more cautious in running deficits”, Europe’s finance ministers have failed to improve the preventive arm of the pact and have thereby sown the seeds of its own future failure, they say. In the next slowdown, countries whose fiscal position is still unsound will again brand the pact as irrational.
The above text is the summary of a commentary entitled ‘The party is over – macroeconomic policy in the euro area after the demise of the Stability Pact’. The commentary was produced by three members of a Centre for European Policy Studies macroeconomic policy group – Daniel Gros, Thomas Mayer and Angel Ubide.