November 09, 2003

European National Sovereignty and the "Stability and Growth" Pact

The Economist decides that in the end Europe's countries are probably still "sovereign"--that the European Union is still the tool and not the master of national governments, at least if the nations are Germany and France: | Charlemagne: ...National control of interest rates came to an end with the arrival of the single currency. But the countries adopting the euro also approved rules limiting their sovereign control over decisions on taxing and spending. Unless a euro member is in a severe recession, it is not meant to run a budget deficit of more than 3% of GDP. Any country that breaches this ceiling for three years in a row is subject to sanctions, and ultimately to fines that can run to billions of euros. These strict rules, known as the "stability and growth pact"?, were adopted at the insistence above all of the Germans, who wanted an absolute assurance that countries with a long history of fiscal incontinence would not damage the euro-area economy.

By a nice irony, however, a sustained period of low growth has meant that Germany itself is now unable to keep below the 3% mark. The latest forecasts from the European Commission suggest that Germany will breach it for the third year running in 2004. The result is that the commission may soon propose mandatory budget cuts in Germany, as a last step before the imposition of fines. Faced with this prospect, Mr Schroeder seems to be having some difficulty ridding himself of those "erroneous ideas of national sovereignty". The idea that the German government may lose control of its national budget and be put under supervision by Brussels is, it seems, too humiliating to contemplate. The Germans are now employing a collection of legalistic, political and economic arguments to avoid accepting the rules that they themselves wrote.

Fortunately for Germany, they have allies in this fight. The French.... The Germans say that, by contrast, they have followed all suggestions previously made under the less onerous Article 104 (7).... So they argue that the commission should invoke Article 104 (7) once again.... Commission officials are not impressed. "It's like when you are playing a game with your kids," says one. "If they begin to lose they want to start all over again." More substantively, the commission points out that the Schroeder government is proposing to cut taxes next year, so it can hardly argue that it is doing everything in its power to curb its deficit.

If the commission forces a head-on confrontation with France and Germany later this month, however, it is the French and Germans who will probably win.... But any such "victory" would, in effect, kill the stability pact...

Posted by DeLong at November 9, 2003 04:31 PM | TrackBack


Italy was the main target, how is it doing?

Posted by: Big Al on November 10, 2003 03:46 AM


Recession and Berlusconi.

Posted by: john c. halasz on November 10, 2003 01:23 PM


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