The Malta Independent
France and Germany are offending the Stability and Growth Pact (SGP) underpinning the Euro monetary union for 12 EU states. In effect France and Germany are running budget deficits beyond what is expected of them under the SGP and rather than make internal adjustments to honour their common currency commitments they are seeking to de-stabilise it. In polite diplomatic jargon they are demanding for flexible interpretation of the SGP.
It is easy to criticise France and Germany and insist that they adhere to the rules which have been enforced with full vigour on smaller EU members. Portugal is undergoing severe fiscal restraint to bring itself within the pact and smaller EU countries have exercised such restraint to ensure that they stay within the set rules. Why should the rules which apply rigorously for the smaller country members but be applied leniently with the big members? The Commission supports a uniform approach and has this week publicly reprimanded France and forwarded its report to the Council of Ministers as contemplated in article 104 of the Maastricht Treaty.
Fairness apart, it would however be unrealistic to expect the Euro area to achieve comparable economic growth with that of the US if its two largest economies, France and Germany, are forced by the SGP to apply the economic brakes on their economies when these are registering anaemic growth if at all. The smaller countries, like Ireland, Austria, Belgium, Netherlands, Finland and Greece cannot on their own deliver the necessary regional growth if France, Germany and Italy fail to notch up their growth` under the adjustment conditions imposed by the SGP.
The European Central Bank exiting president, Dutchman Duisenberg, is right in arguing that France and Germany did not save for the rainy day when the going was good. Germany is still paying the cost of the integration of its former eastern part whereas France lavished in solving problems by working a shorter week, a measure which has seriously prejudiced its international competitiveness. But the clock cannot be put back and I don`t think that the Euro area urgent growth problems can be solved by the rigid application of the SGP on its two or three largest economies.
Reality is that when the SGP was devised way back in 1992 its conditions were set to suit a very different scenario from the one we have today. The threat to Growth was then perceived to be excessive inflation which was sourced from excessive budget deficits. So the way the SGP was drafted, principally by the Germans, was to ensure that the risk of inflation is controlled by putting strict conditions on the size of the budget deficit assuming that once inflation is controlled sustainable growth would automatically follow.
The situation today is very different. In spite of excessive budget deficits there is no risk of inflation which is hitting record lows well within the ECB`s target range. But low inflation is not delivering growth and in old-fashion Keynesian style the US is pump-priming the economy by running huge budget deficit at a time of record low interest rates.
Is it wise for Euro countries continue to invoke strict application of the terms and conditions of the SGP written under very different conditions and aimed to address very different circumstances than those prevailing today, whilst the US goes for growth free from the restrictions of strict monetary unions rules regarding debt and deficit ?
The argument is made that any flexible interpretation or outright revision of the SGP would loosen international investors` faith in the Euro. This is not something that in normal circumstances should be taken lightly. But these are not normal circumstances. The Euro is hardening too rapidly on the foreign exchange market and the ECB will have to do something about it to retain international competitiveness. It could of course reduce Euro interest rates further and bring them down to US levels and below the actual inflation rates. But it could also, and may be more effectively, re-write the SGP rules to re-balance the obligation of Growth with the obligation of Stability as it is clear that stability in fiscal positions is no longer delivering the desired levels of growth. If this could force down the Euro a little bit from its current strength then so be it.
With a Frenchman about to take over the ECB may be France stands a better chance of making the Council of Ministers and the Commission see the light. It will definitely find backing from Germany and Italy, second line offenders, and could overcome the objections of the smaller countries who rightly argue that they are made to honour the rules whilst the rules are made to honour the big countries. That`s life!
France and Germany are offending the Stability and Growth Pact (SGP) underpinning the Euro monetary union for 12 EU states. In effect France and Germany are running budget deficits beyond what is expected of them under the SGP and rather than make internal adjustments to honour their common currency commitments they are seeking to de-stabilise it. In polite diplomatic jargon they are demanding for flexible interpretation of the SGP. It is easy to criticise France and Germany and insist that they adhere to the rules which have been enforced with full vigour on smaller EU members. Portugal is undergoing severe fiscal restraint to bring itself within the pact and smaller EU countries have exercised such restraint to ensure that they stay within the set rules. Why should the rules which apply rigorously for the smaller country members but be applied leniently with the big members? The Commission supports a uniform approach and has this week publicly reprimanded France and forwarded its report to the Council of Ministers as contemplated in article 104 of the Maastricht Treaty.
Fairness apart, it would however be unrealistic to expect the Euro area to achieve comparable economic growth with that of the US if its two largest economies, France and Germany, are forced by the SGP to apply the economic brakes on their economies when these are registering anaemic growth if at all. The smaller countries, like Ireland, Austria, Belgium, Netherlands, Finland and Greece cannot on their own deliver the necessary regional growth if France, Germany and Italy fail to notch up their growth` under the adjustment conditions imposed by the SGP.
The European Central Bank exiting president, Dutchman Duisenberg, is right in arguing that France and Germany did not save for the rainy day when the going was good. Germany is still paying the cost of the integration of its former eastern part whereas France lavished in solving problems by working a shorter week, a measure which has seriously prejudiced its international competitiveness. But the clock cannot be put back and I don`t think that the Euro area urgent growth problems can be solved by the rigid application of the SGP on its two or three largest economies.
Reality is that when the SGP was devised way back in 1992 its conditions were set to suit a very different scenario from the one we have today. The threat to Growth was then perceived to be excessive inflation which was sourced from excessive budget deficits. So the way the SGP was drafted, principally by the Germans, was to ensure that the risk of inflation is controlled by putting strict conditions on the size of the budget deficit assuming that once inflation is controlled sustainable growth would automatically follow.
The situation today is very different. In spite of excessive budget deficits there is no risk of inflation which is hitting record lows well within the ECB`s target range. But low inflation is not delivering growth and in old-fashion Keynesian style the US is pump-priming the economy by running huge budget deficit at a time of record low interest rates.
Is it wise for Euro countries continue to invoke strict application of the terms and conditions of the SGP written under very different conditions and aimed to address very different circumstances than those prevailing today, whilst the US goes for growth free from the restrictions of strict monetary unions rules regarding debt and deficit ?
The argument is made that any flexible interpretation or outright revision of the SGP would loosen international investors` faith in the Euro. This is not something that in normal circumstances should be taken lightly. But these are not normal circumstances. The Euro is hardening too rapidly on the foreign exchange market and the ECB will have to do something about it to retain international competitiveness. It could of course reduce Euro interest rates further and bring them down to US levels and below the actual inflation rates. But it could also, and may be more effectively, re-write the SGP rules to re-balance the obligation of Growth with the obligation of Stability as it is clear that stability in fiscal positions is no longer delivering the desired levels of growth. If this could force down the Euro a little bit from its current strength then so be it.
With a Frenchman about to take over the ECB may be France stands a better chance of making the Council of Ministers and the Commission see the light. It will definitely find backing from Germany and Italy, second line offenders, and could overcome the objections of the smaller countries who rightly argue that they are made to honour the rules whilst the rules are made to honour the big countries. That`s life!
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