The Stability Pact crisis

” When someone says important things, it is bound to create disputes,» said an aide to European Commission President Romano Prodi in the aftermath of the uproar caused by his superior’s description of the EU Stability Pact as «stupid, as any rigid rule.» No one can appraise the hidden aspects of Prodi’s such sudden intervention in an issue that has rocked the foundations of Maastricht Treaty-based Europe. There is no doubt that the debate that has begun over the new political geometry – the new administrative structures of the EU after enlargement to the east – includes the renegotiation of many of the compromises that had been reached during the process of creating the eurozone. Germany, the mentor of the fiscal «dogmatism» that cajoled the other member states into the adoption of the rule for restricting budget deficits to a maximum 3 percent of GDP, and the other large countries are now ready to accept the loosening of the principle. About six years ago, German politicians and citizens feared that the French (and the Italians, of course) would easily return to policies of fiscal laxity after the period of belt-tightening in order to achieve the criteria for the creation of the eurozone. In fact, things have turned out quite differently: Senior officials of Germany’s Social Democratic Party in the European Parliament were saying last week that the way the Stability Pact was managed was ridiculous and had «further weakened the countries that faced problems.» The big loser from this upheaval has been none other than Economic Affairs Commissioner Pedro Solves, who is directly responsible for the recommendations regarding the application of the principles of the Stability Pact. Prodi’s statement in an interview with Le Monde can be interpreted as an indirect apology by Brussels for Solbes’s rather humiliating warning to the new French government this summer when it was considering a draft budget without any cuts in the already high deficit. France was the first to make it clear that it did not intend to stick to its predecessor commitment to proceed in the spring with an urgent trimming of its deficits. But France’s stand is largely explained by the backstage deliberations of Germany, which had been working throughout the summer to secure the «silence» of other partners when the divergence of its own fiscal affairs became evident. The condemning stance taken toward Prodi’s statements by Greek Economy and Finance Minister Nikos Christodoulakis, who currently presides over the «Eurogroup» of his colleagues, is explained in two ways: The Greek government has its own internal reasons for not wanting a debate about fiscal laxity. It also has the opportunity to present itself as serious and disciplined, since its fiscal affairs are under control – at least on paper. Even if Eurostat’s review of our account books, which is pending, reveals significant discrepancies, a strict president will be in a better position to negotiate the wording of any public statements. Besides, European Central Bank Vice President Lucas Papademos’s comments were much in the same spirit. He said the principles of the pact must be observed but added that «there is room for making their application more effective.» Papademos believes that the philosophy of the Stability Pact is correct but that care must be taken to make its management more effective and convincing. There is no doubt that the big countries’ new, fiscally milder stance is an annoyance to the smaller EU members, particularly when they recount the spate of austerity measures and restrictions they had to adopt, following frequent «orders» and during politically difficult times. The selfishness of the big countries, which set the rules according to their own needs, creates cracks in the principle of solidarity and cohesion in the EU. Nevertheless, in the midst of this uproar, it is advisable not to hasten to believe that we are on the way toward a collapse of all rules that secure fiscal stability – quite the contrary. But the debate is useful in many ways, particularly as regards the formulation of new rules aimed at an improved coordination of policies in the sectors of taxation, banking and social insurance.