Tuesday, March 22, 2005
Luxembourg scores a major success
Secondly, the stability and growth pact over emphasized inflation fighting over economic growth/employment. These changes should help Europe grow fast (For good or ill).
Jax
Jean-Claude Juncker, the prime minister of Luxembourg, is a master of late-night deals in smoke-filled rooms, and few are as important as the agreement to reform the stability and growth pact, the rule-book that governs eurozone budget deficits and is supposed to keep the member states on the fiscal straight and narrow. Mr Juncker, the current holder of the EU's rotating presidency, is guaranteed the support of the union's 24 other leaders at their spring economic summit in Brussels today: the pact once decried as stupid by Romano Prodi has finally become a little more intelligent.
The changes recognise the reality that the pact has been more honoured in the breach than the observance: every year for the past three years, Berlin and Paris have been censured by the European commission for exceeding the deficit limit of 3% of gross domestic product, but have evaded punishment. The irony is that it was Germany, about to abandon its beloved deutschmark, which insisted on this rule for fear that profligate southerners would spend their way out of a crisis. But that was in 1997, and this is now, with sluggish growth, low tax revenues, and 5 million Germans unemployed.
Economics, not for the first time, has been driven by politics, with Gerhard Schröder and Jacques Chirac, respectively facing elections and a vital European referendum, anxious to avoid further trouble and get the commission off their backs. Italy is locked in a row over the method of calculating its deficit. All three have caused resentment in smaller countries with tighter fiscal discipline, notably the Netherlands and Austria.
Britain, outside the eurozone, is not directly affected, but Gordon Brown has long argued for flexibility - and of course for national capitals, not Brussels, to have the last word. If the UK is ever to join the single currency, any chancellor will want to avoid rules which might limit investment in public services.
Germany pleaded that it should be treated as a special case because of the cost of reunification - at 4% of GDP a year, or €80bn, a massive contribution to Europe as a whole. The quid pro quo for France was recognition that it could exempt from its deficit investments in defence - billed as a European rather than a national good. Newcomers such as Poland were told they could ignore deficits created by spending on pensions. Something for everyone helped sweeten Mr Juncker's latest deal. The concern must be that the get-outs are too many and too vague to constitute the firm rules needed to make the eurozone more workable - and more credible.
