The reader may rest assured: the Stability Pact is not dead and will be revised, and the euro is not in danger. The euro' s stability does not depend on a few billions extra in the 2004 budgets of France and Germany. I am not trying to say that the events of last week were unimportant, revealing certain potentially dangerous trends, or to deny that they have shaken the institutional set-up of the European Union (disquieting lawyers), I'm simply challenging some of the dramatic and even melodramatic conclusions made about the demise of economic coordination and the stability of the euro. In the process of its construction, Europe as seen other events over the last fifty years. One only has to go back as far as the war on Iraq to see that disagreements led to pronouncements that the common foreign policy and defence Europe were dead, but since then we've seen efforts and initiatives in this direction more promising than ever. ! Crises are dangerous at the time they occur, and may be difficult to overcome, creating a feeling of danger, whence initiatives to resolve them. We have neve heard so many strong words about strengthening the "limping leg" of EMU, defence of the Stability Pact and a desire ot make it more balanced and effective.
Concerned and even indignant commentators are welcome, but I feel some of the conclusions so excessive and unjustified that I will argue against them, at the risk of going a bit too far in the other direction. A few thoughts calling for restraint and not paying attention to exaggeration.
1. All called for the Pact to be respected. The needs for the Stability Pact and the will to respect it were formally underlined with unusual vehemence by the Ecofin Council, speaking unanimously (all 25 countries), stressing the surveillance of budget changes in the two countries in question, which made firm commitments at the Council. In terms of principles at least, far from showing mistrust or lack of interest in the Stability Pact, all the finance ministers reaffirmed its centrality.
2. Confirmation of its efffectiveness. Without the Stability Pact, restraints on Member States would be less detailed and rigorous and pressure on France and Germany would not have been as strong. It is the existence of the Pact and its procedures that gave this issue all its glitter and visibility. Putting two big Member States in the dock and their authorities accepting their economic and budget policies being put under surveillance and having to apologise, would have been unthinkable a few years back. The two governments in question restated their firm intention to meet their obligations under the Pact, which demonstrates it effectiveness despite obstacles to its procedures (see point 8 below on the views of one of its drafters, Yves Thibault de Silguy).
3. Only the Commission… The preparations, debate at the Council and its outcome have shown than only the Community Method can allow progress of this type, and only the strength of the institutions - in this case, the Commission's powers and independance - can apply pressure on two big Member States and make them justify themselves. In an intergovernmental framework, without the Commission's "Recommendations" and its role as Guardian of the Treaties, everything would soon have been wrapped up in the wrong way. Several Member States critical of France and Germany gradually came round to the final compromise, and I wonder whether some that supported the Commission's recommendation until the last moment (the final vote) would have done so in an intergovernmental set-up. The small and medium-sized countries that seem to be giving in to the temptation to reduce the Commission's powers should think about this - the Commission's strength is their be! st guarantee.
4. "The Stability Pact is not dead". The first comments, hot off the press, from Romano Prodi were: "The Stability Pact is not dead, far from it." Firmly noting that he disagrees with the Council's final decision, President Prodi said the Commission would be calling for its full application and monitoring it even more closely. In written comments published the next day, Prodi said the Commission would be very closely monitoring respect of commitments made by Germahy and France to ensure the agreed upper limit for the budget deficit (3% of GDP) is not exceeded in 2005. The Commission does not believe the Stability Pact has come apart at the seams, on the contrary, it is planning to step up surveillance of its application;
5. The review is going ahead. In the comments quoted in (4) above, the Commission announced initiatives to ensure better governance of the economy in the EU because the current situation is not satisfactory. The review will not cover the principles (which have been confirmed) but the Pact's operating rules and this is now an official plan. The "small crisis" achieved what suggestions, polemics, arguments, preparations, etc were unable to.
6. The figures speak for themselves. In a letter published in Friday's "Corriere della Sera", Romano Prodi writes of substantial agreement on the substance of the budget measures to be taken by France and Germany. Disagreement was far more legalistic than economic. It is surprising to read the dramatic and categorical opinions of the substance of the measures, given that the difference between what the Commission recommended and what the Council agreed upon covers around 0.2% of the GDP of each of the two countries. It has been pointed out that this is less than the normal statistical margin of error for either GDP itself or the budget deficit. It is absurd to conclude that the budget policy of a country has changed on the basis of rejection or acceptance of this 0.2% reduction in public spending.
7. "The Stability Pact is starting to work". Compared with sensationalist headlines (one big newspaper said the Stability Pact had imploded, another wrote: "Here lies the Stability Pact, born in Amsterdam on 17 June 1997, died in Brussels on 25 November 2003"; to quote but two), more reasonable statements have less impact. There are as many of them, however, from qualified sources. Leaving aside the finance ministers, who naturally defended the choice they made in the negotiations, I will simply point readers to what Belgian Minister Didier Reynders said (see our bulletin of 26 November, page 7), and note that alongside the sensationalists, there were wiser, more moderate reactions.
In this connection I will quote one of the founders of the Stability Pact, former European Commissioner for Economic and Monetary Affairs, Yves Thibault de Silguy. He feigned astonishment at a question about the health of the Pact: "Why, what has happened that's so serious?". Rejecting "the rhetoric of catastrophe", he said the Pact was starting to work (because France and Germany have made firm commitments but wouldn't have done so without the Pact) and highlighted the vital importanc of any commitment to cut budget deficits because any percentage point less in the deficit compared with the EU's GDP, means EUR 60 billion for consumers and investment, rather than paying interest on public debt. de Silguy feels that the policy of deficit is ineffective in reboosting the economy, noting that the efforts made in his time by some Member States to respect the criteria for joining the euro had "drugged" growth by putting cons! iderable sums into the economy which had previously been earmarked for servicing the debt.
8. Even the European Central Bank… The ECB logically shares the Commission's negative views, expressing regret and great concern at the outcome of the Ecofin Council. But far from believing the Pact to be dead and buried and that everyone will do as they please from now on, the ECB insisted that France and Germany must take effective action with regard to their public finances in order to limit negative repercussions on confidence of what it sees as the over-weak conclusions of the Council. The ECB confirmed the veiled threat mooted last week - if these events lead to a slump in confidence in the euro and send inflation up, it will not hesitate to raise interest rates. This prospect should make any eurozone country have second thoughts that might be tempted to take inflationary measures to boost growth because increased interest rates would inexorably smash any attempts to stimulate growth. This warning from the ECB also explains the un! animous calls for tight control of public spending. The effectiveness of the ECB's comments confirms, in my opinion, point 3 above - it is Community institutions and bodies, not intergovernmental cooperation, that can bring the situation under control and remedy slippages.
9. Some coherence, please. Another comment about the euro. It is odd that the very people decrying the dangers of a strong euro (because it hampers EU exports) also slam the risk of the Ecofin Council's attitude causing the euro to suffer from weakness. Luckily nothing of the sort happened. Some comments only serve to confirm trends to talk the euro down no matter what, describing it as responsible for something when in fact it is one of the pillars on which the EU of tomorrow will be based, mistress of her own destiny.
A brief concluding comment: according to Belgian finance minister Didier Reynders (see above), sanctions are a deterrent and are not made to be used. In my column on 23 November I wrote that in my view, while the existence of certain sanctions is vital to guarantee the effectiveness of the Stability Pact, sanctions in the form of fines on Member States are not suited to the nature of states. This should be considered in the review of the Pact announced by the European Commission.
(F.R.)