Agreement on the revision of the stability pact is a limited but real step forward towards governance of EMU (Economic and Monetary Union) through better balance between its two arms: the monetary arm, a process that has been running smoothly and assuredly since the birth of the euro under the guidance of the European Central Bank (ECB), and the ill-assured and hesitant economic arm. It is true that the pact covers only one component of economic policy: budgetary issues. But it is nonetheless an essential component, not to say the most important one in our countries where public spending is not far off half of member states' GDP, and sometimes above it. The stability pact in its old form was not very effective from the point of view of governance because it was too mechanical and more “punitive” than preventive. The new text will be written in the next few months on the basis of legislative proposals to be presented by the European Commission, but it will determine the behaviour of institutions responsible for applying it from now on, encouraging behaviour that will help the renewed Lisbon strategy succeed.
Respective roles of the ECB and the Eurogroup. I have already said that in my opinion we should reject interpretations that say the pact has simply been made more flexible and less rigorous in order to allow the limits on deficits to be exceeded. It is possible or even probable that this may have been at the root of the initiatives and positions taken by some heads of state and by some political forces; but it is the result that counts and we know that requests to change the ceilings or to exempt certain “virtuous” types of spending from the deficit calculation were not taken up. In practice, the increased flexibility will encourage spending for the future and will prolong to some extent the period allowed for its positive budgetary influence to take hold before punitive measures for exceeding the “reference value” are taken (see this section in bulletin no. 8916). The opinion of the main architect of the change, Jean-Claude Juncker, is reflected in the three Benelux countries' joint statement, which was a response, moderate in its tone but vigorous in its substance, to comments promoting the idea that the pact had been weakened. The statement begins powerfully: “The pact keeps all its strength and scope. Its role as an important instrument in the promotion of budgetary discipline is confirmed and it now has new life and a more suitable basis for rational economic implementation.” (For a full summary of this statement see bulletin no. 8916).
So, how should we interpret the reservations and perplexity of the European Central Bank? It is an entirely normal reaction in line with the organisation's role. The ECB is responsible for the euro's stability and for keeping inflation under control; it has let it be known that if these two goals are compromised it may act on exchange rates. The influence that rumours and psychological factors have over financial markets is well known; interpretations of the reform as “lax” render it inevitable and almost obligatory for the ECB to reassure markets with a renewed statement in favour of budgetary orthodoxy and an indirect reaffirmation of its ability to act, together with its president's reminder to MEPs that the ECB must remain credible: only the certainty that it would stick to its mandate on price stability was allowing historically low interest rates and enabling borrowing over 30 and even 50 years, and it would encourage renewed growth in private consumption, said Jean-Claude Trichet.
Mr Juncker calls for dialogue. Messrs. Trichet and Juncker's nearly parallel statements have opened a relationship of public dialogue that I feel augurs well. Jean-Claude Juncker said in a recent interview: “Once reform of the pact is through, I expect to get more involved in the coordination of economic policy. (…) Dialogue between the Eurogroup and the ECB should be strengthened without confusing our roles and without our becoming involved in quarrels over prestige. The monetary authority may issue value judgements on member states' budgetary policy and we are not going to contest that prerogative. But we will not be prevented from speaking with the same candour and from communicating our preferences to the president of the ECB. That is what I want within the Eurogroup, without placing these debates in the public arena.” And he added: “I must say that without the single currency and the calm hand of the ECB our economies would not have resisted the political and financial torments of the 1990s.” But he felt the time for dialogue had come. We must not forget that Mr Juncker has chaired the Eurogroup for two years. (FR)