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Thursday, August 29, 2002
01:23 a.m.
Euro/EMU - stability pact under real threat?``
Reports of the euro's sickness have been frequent as well as exaggerated. At times, there's seemed almost to be a conspiracy between the naysayers, delighted to have their forecasts of doom borne out, and some Eurolanders (the Germans, in particular) pleased to have euro parities against dollar and yen depressed by such reports, for the support their ailing economies thereby obtained.
However.....
All EMU members are signed up to certain economic obligations under the
Maastricht Treaty of 1992. The nature of those obligations is clarified and expanded upon in the
Stability Pact of 1997.
Already, there have been suggestions - notably from the Italian government - that the terms of the Pact should be
looked at again. To consider, for instance, whether, in calculating budget deficits, borrowing for investment should be excluded.
But now, it seems, the system is to be
tested for real.
One of the requirements of the Treaty is that (broadly speaking) an EMU member's budget deficit should not exceed 3% of GDP.
Portugal first estimated its deficit (for 2001) at 1.1%; it now puts it at 4.1%!
The European Commission fully intended earlier this year to serve
'early warning' notices on Portugal and Germany (a 2.7% deficit in 2001), but was
prevailed upon not to do so [6]. (The suggestion is that, had the warning been issued, Portugal might well have started to remedy the situation earlier.)
Now that the 3% limit has been exceeded, the Pact provides for a complex procedure to assess the Portuguese deficit, and the government's proposals to ensure it reverts to
compliance with EMU rules (a
summary of the procedure). Theoretically, the country could even be fined for non-compliance.
Never going to happen, of course. (Whatever happened to the astreinte (daily fine) on France for
failure to lift the beef ban? Same principle.)
Besides, smaller nations can hide behind the coat-tails of Germany, whose
2002 deficit is forecast by the Bundesbank to be much the same as 2001's.
The plan that EMU member budgets should be
'close to balance' by 2004 now seems pretty fanciful.
Leaving the choice of
(a) accepting failure;
(b) delaying the 'balance' year to 2005 or later; or
(c) (as suggested by Italy) changing the definition of 'balance'.
Which would hurt the euro's credibility most, I wonder?
The real problem lies with the 3% and other Maastricht quantitative tests themselves. Only those manufacturing a Mickey Mouse currency would think of so shackling the economies that were to use the currency.
The guiding (and utterly fallacious) principle seems to be, the harder a test is to pass, the harder the currency that is subject to it. Surely experience with the Gold Standard in the last century proved that how wrong that notion is?
The infamous quote of ex-Chancellor of the Exchequer Norman Lamont
"If it's not hurting, it's not working"
is doubtful as it stands. Placing both clauses in the affirmative yields a manifest falsehood.
Thankfully, from this side of the Channel, we can view this nonsense with an element of detachment. Except that the economic instability and depreciation of EU instititutions consequent on such shenanigans will catch up with us eventually - even if, as seems increasingly likely, we'll be keeping sterling for several years yet, at the very least.
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