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Wednesday, November 26, 2003

Rest in Peace

Apparently the stability pact is dead. At least this is how the papers have it. Clearly this is not the end of the story, merely the begining.

Last week the euro was at all time highs, now the stability pact is all but dead. Normally the euro should be coming down: but it isn't. So this situation is not normal by any stretch of the imagination. We have what I think they call fundamental uncertainty, and this is characterised by inability to see very far: like one of those dense fogs we used to have in the Liverpool of my childhood. Clearly the political controversy promises to be a stormy one: Zalm must be typing away on his weblog this very moment. But this is not the most important part of the picture now. The important question is what will be the structural implications for the euro-group and for their relations with the non-euro EU countries.

Cutting adrift from the stability pact really is cutting adrift. In one sense it is a gamble, for if Germany and France can 'turn the corner' economically speaking in 2004, then they can end the year smelling of roses. My preoccupation is, however, that this may not be as easy as this. Germany has been staggering along with insipid growth since the mid ninetees, and I don't see anything which convinces me that this is going to change. So the possibility exists that this time next year we will find ourselves in a worse version of the same situation. Short term some kind of institutional identity crisis seems guaranteed, but it is probably only when we get to the back end of next year that we really will be able to see the full implications of what happened yesterday.

Germany and France on Tuesday smashed apart the political deal underpinning Europe's single currency, increasing tensions among European Union member states and prompting warnings of higher long-term interest rates. Less than two years after the launch of euro notes and coins, the EU agreed to suspend the sanctions mechanism of the stability and growth pact - designed to enforce fiscal discipline among member states. The suspension, to protect Germany and France from the humiliation of taking economic instructions from Brussels, was strongly opposed by many smaller EU member states.

The European Central Bank, which indicated that the collapse of the pact could force up eurozone interest rates, said the decision carried "serious dangers". The pact aims to stop governments running excessive deficits, defined as 3 per cent of gross domestic product, and carries the threat of fines for repeat offenders.The European Commission, the guardian of EU law, on Tuesday hinted that it might launch a legal challenge, saying it "deeply regretted" what it regarded as one of the most flagrant breaches of European rules.

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