N. 25 October 2002 | Asymmetric shocks, the Achilles heel of the Stability Pact

Having a single currency alongside with a european budgetary policy, irrespective of Member States, implies the creation of a truly federal State made possible by an initially small group of States.

Cracks have recently started appearing in the Stability Pact, which the so-called Eurozone countries entered into as a means of guaranteeing the conditions needed to ensure the survival of the single currency. The danger that the Pact would be undermined by one or more asymmetrical shocks was – it might be recalled – widely predicted both by eurosceptics, who did not want the euro to be introduced in the first place and certainly hoped that it would quickly be abandoned, and by federalists, who pointed out the risks it would be exposed to, and pressed for decisions that would eliminate these risks. But no one would have predicted that these first signs of the Pact’s weakness would appear so soon.

The first asymmetrical shock came in the form of the floods that recently devastated Germany and Austria, as well as some of the central European states that are candidates for EU membership. But even prior to these floods, there had already been signs that the Pact was feeling the strain of the divergent directions taken, both to counter the effects of the economic downturn and to boost consensus in election periods, by the economic policies of the various governments. Portugal has already been officially reprimanded by the Commission for exceeding the budget deficit threshold – a fate, what is more, that Germany, France and Italy have so far avoided only thanks to “creative accounting.”

Consequently, pressure is mounting for broader interpretation of the Stability Pact – at this point, the boundary between interpretation and violation appears blurred – and for its modification. Suggestions have included raising the budget deficit limit to 4% of the GDP, putting back, by a year, the deadline for achieving a balanced budget, excluding investment spending from the calculation of the deficit, and other tricks of accounting. For the time being, these constitute little more than signals that, given that the limits established by the Pact are, to a great extent, arbitrary, can be considered unimportant. Indeed, raising these limits by one per cent here, or a year there, or introducing alternative methods of calculating the deficit would not, in themselves, be particularly significant moves. What should be generating real concern, on the other hand, is the apparent incapacity of the Eurozone governments to follow convergent budgetary policies of any kind (unless the definition of convergence is so broad as to render the Pact entirely meaningless).

It has to be said that the need for flexibility that is emphasised by some struggling European governments, is, in abstract terms, quite justified. But it is also true that a balanced budget is necessary in order to prevent the cumulative public debt from reaching – as it already has in some EU member states – catastrophic levels. However, a balanced budget can only be achieved by offsetting, over a long period of time, the surpluses generated in profitable years against the deficits from negative years. In any case, a government that really wants to govern needs to have, when defining its policies and making short-term decisions, plenty of room for manoeuvre. But the need to respect the terms of the Stability Pact is placing untenable restrictions on the European governments and forcing them to follow a structurally deflationary policy that is impracticable in today’s difficult economic climate.

On the other hand, the Stability Pact is by no means the product of a deliberate effort to slow down the European economy. It was an inevitable by-product of the decision to launch a single currency in a group of states whose governments were, at the same time, determined to hold on to their power to implement their own, independent, budgetary policies. Indeed, had the governments not been contractually bound to respect certain parameters, their freedom would inevitably have had unacceptable consequences, with the least responsible among them allowed, by exporting inflation, to make their partners meet the costs not only of their investments and emergency measures, but also those generated by their wastefulness and cronyism. It must thus be emphasised that any proposal that undermines the Stability Pact constitutes, in fact, an attack on the single currency.

But the Stability Pact is as necessary as it is impossible (at least in the medium term) to adhere to – and the reason for both of these characteristics lies in the contradiction, evident in the Eurozone countries, between the existence of a single currency created from a European perspective and that of twelve independent budgetary policies implemented on the basis of twelve divergent national agendas. It thus follows that there is only one way out of the alarming situation currently emerging in Europe: that of introducing, alongside the single currency, a single European budgetary policy that is flexibleand not bound, by any sortof pact, to anyone. Clearly, this cannot be achieved by the current European Union, the size of whose budget (negligible) is agreed by the governments, which are also required to pursue parallel deflationary policies – an impossible task in the medium term. What is needed is the creation, even in what will initially have to be the more limited framework of a core of countries, of an out-and-out federal state, with a democratic government and a parliament – the latter based on a bicameral system that would naturally include a chamber of states – that, while respecting the financial autonomy of the member states, have the power to decide the Union’s deficit levels and the size of its budget, and are equipped with the instruments needed to fund the latter independently,through taxation and the issuing of loans. It is a radical step forward, and as such will require courage and determination. But anyone who rejects it in the name of “realism”, which is to say out of the jealous desire to hold on to national power, has a duty to set forth a feasible alternative that might allow Europe to prevent the euro from sinking into an irreversible decline and the Union itself from heading towards its own disintegration.


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