Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Tuesday, June 25, 2002

How Flexible is Flexible

The news drom Seville is that everyone went away happy. But should this have been the case? Clearly a move in EU policy away from a monorail obsession with inflation, at a time when the most preoccupying tendencies appear to be deflationary, should be a good thing. At the same time the preoccupying fiscal unsustainability of some of the European economies in the mid-term, and Italy immediately comes to mind here, means that cyclical automatic stabilisers should not be used as an excuse for avoiding the issue.

EU leaders, meeting in Seville, gave France, Italy and Portugal more time to eliminate their budget deficits, while Edmund Stoiber - the frontrunner to become German chancellor in September - warned that his country may need until 2006.

Slower than expected economic growth and a diminishing political will to tackle deficits is putting the EU's growth and stability pact to its greatest test since the euro was launched.
The European Commission, which polices the stability pact, insists it is vital for governments stick to their promises to bear down on budget deficits in order to maintain confidence in the currency. The underlying fear is that if countries such as France and Germany retreat on commitments they have given, then a free-for-all could develop, with smaller countries following suit.

The EU summit in Seville endorsed a compromise deal, hammered out by finance ministers in Madrid in the early hours of Friday morning, for a watering down of the guidelines to France, Portugal and Italy over their budget deficits.France and Portugal have now been told to get their deficits "close to balance" in 2004 instead of to zero, giving them extra room for manoeuvre. Italy had a similar wording inserted, and was told to have a close to balance budget in 2003.
The Italian government over the weekend jumped on the opportunity to cut taxes and spend more on unemployment benefits following the EU's decision to ease its deficit target. Prime minister Silvio Berlusconi's cabinet in coming days is expected to announce tax cuts next year for low income households and for corporations - two promises Mr Berlusconi failed to keep this year following his election in 2001.

Italian officials also hailed the EU decision as a shift to "a political approach to the stability pact", highlighting a view that finance ministers at the Ecofin council are taking a more flexible approach to the stability pact than the Commission.
Source: Financial Times LINK

Of course it's precisely the "political approach to the stability pact" which makes Italian politicians so euphoric that is in fact most worrysome. If Europe's problems are merely centred on the need to adapt flexibly to a cyclical downturn, well then, where's the harm. But if, and it's a big if, the EU economies problems are much more deep seated, and at the same time poorly understood, then could this fudging really only serve to produce bigger problems in the future?

No comments: