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Wednesday, July 16, 2003

The European Straightjacket

This row is set to continue all summer, and as far into the future as the eye can see. In fact I don't see where we can find an 'end game' here. Certainly the 3% limit means seems to have become the yardstick rather than the upper limit. It is impossible to know how many states will be over the limit in fiscal 2004, and it is difficult to see the 'usual suspects' coming much below 3% in the foreseeable future. This means that the growth and stability pact must be effectively dead, despite Pedro Solbes' best efforts. It is simply a question of when the doctors (who make their diagnosis with one eye on the politicians, and the other on their reputations, since if the pact is dead, where is plan B?) diagnose the fact. In this I have a certain sympathy for Pedro Solbes who at least (see my demography website page, and see especially the material on the problematic state of the French system) recognises that these financial dynamics are not sustainable, and it is only a qustion of time before this reality dawns on the financial markets and the herding phenomenon takes hold. Of course, in the final analysis his position is also unsustainable, since simply clinging to the liferaft of the stability pact won't work either. Europe needs a bold initiative, courage and foresight. But this is precisely what the rigid EU system of vested local interests via tha nation state politicians (always playing for the short term), the bureaucratic machine in Brussels and the 'closed mindset' a la ECB simply can't deliver. What Europe needs is a bold gamble, what in Spanish we call una huida por delante (a flight - 'fleeing' - forward) on the fiscal front, backed by real instituational and minset changes, a new sense of solidarity and sacrifice by one state for another (not leaving Germany, for example, to do all the heavy lifting), and a welcoming process for some systematic re-population (let's not mince words, and call something by its real name). But since Europe's politicians seem congenitally incapable of grasping this nettle, it is hard to be optimistic these days. (Incidentally, I don't want to brag or anything, but since both Brad and Paul understandably like to sentimentally recall their 'good calls', and since now it seems that virtually every garden variety politician is talking about the euro and stability pact 'straightjacket', I would just like you to consider for a moment where you might have seen this expression first. Don't worry, if my theories are anything like on target, this won't be the last time you read about it first in Bonobo Land. And they like to say we bloggers are a bunch of inept 'amateurs'. Amateurs, I don't know, but aficcionados, certainly. (As you will have noticed, blog critics certainly are right about the spelling mistakes).

The club of European finance ministers which sets policy for the single currency was in disarray following an acrimonious dispute on Tuesday over France's rising budget deficit. Small member states, which have battled to stick to the EU's budget rules, finally lost their temper with France, which is threatening to break them for the third successive year.

The code of secrecy which surrounds meetings of the 12 member "eurogroup" of finance ministers was broken by Austria's Karl-Heinz Grasser, who revealed that France had admitted it expected to break the rules in 2004. France retaliated by accusing Mr Grasser of trying to "kill" the eurogroup, by revealing the private dinner table discussion in Brussels.

Mr Grasser's indiscretion is a symptom of rising tensions within the 12-member single currency zone, with some claiming that big countries such as France and Germany are flouting the EU's stability and growth pact with impunity. Mr Grasser said Francis Mer, French finance minister, warned on Monday night that his 2004 budget was likely to break the stability pact's deficit ceiling of 3 per cent of gross domestic product.

Mr Grasser said: "He [Mer] said that from his point of view in 2004 [the French deficit] would clearly not be below 3 per cent. "If France were to go over 3 per cent for a third year, then sanctions must be the consequence." Charlie McCreevy, Irish finance minister, called on France and other countries to stick to the rules. "We have gone through hell and high water to agree with the stability pact," he said. Gerrit Zalm, Dutch finance minister, accused Jacques Chirac, French president, of trying to "storm the stability pact" when he called on Monday - Bastille Day - for the pact to be softened.

A French government spokesman refused to comment on Mr Mer's comments, but reacted furiously to the Austrian finance minister's words. "Mr Grasser can make whatever comments he wants, especially if he wants to kill the eurogroup." The dispute is one of the most serious to hit the eurogroup, which holds private talks without notetakers on sensitive issues of fiscal and monetary policy.

It also raises the prospect of some euro members demanding that the European Commission take punitive action against France and Germany if it becomes clear that their 2004 budgets will breach the stability pact. The controversy over the pact is set to be reignited on Wednesday when a group of experts set up by Romano Prodi, commission president, will call for further changes to its rules.

The group, set up by Mr Prodi a year ago, addresses one of the core aspects of the pact. The experts write that "the conditions under which the 3 per cent deficit threshold can be breached should be modified" - an idea that could affect the centrepiece of the pact itself. On Tuesday, Mr Prodi's spokesman said that the group was independent and did not reflect the views of the commission itself, but it includes two of Mr Prodi's key advisers. John Snow, US treasury secretary, meanwhile praised Mr Chirac for sparking debate on the stability pact. He said: "It's a mistake for economies to put themselves in straitjackets. Whether [the stability pact is a straitjacket] I do not know, but to raise the issue is very appropriate."


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