The EU's stability and growth accord may well be scrapped now Germany and France have been allowed to flout its rules
What would the European Commission do to any future Eastern European member that adopts the euro and violates its budget deficit rule? Would the commission be willing to grant Poland, for example, an indulgence the way it has done for France and Germany?
The dozen countries that share the euro are bound by a stability and growth accord that requires each member to limit annual budget deficits to less than 3% of gross domestic product.
The irony is that Germany, which came up with the idea for the agreement, is one of the countries in violation. Germany and France ran budget deficits in excess of 3% in 2002. It is highly likely both will exceed the limit this year and 2004 looks to be no different.
Under the terms of the agreement, a member country that signed it can be fined as much as 0.5% of gross domestic product for budget violations. Count on hell freezing over before that ever happens to France or Germany.
Instead, an accommodation was made in March. The budget rule was relaxed, a prime example of what could be politely called the triumph of influence over accounting. The indulgent commission agreed to permit 'cyclically adjusted' budget measures.
Is that any way to set a good example? While the world grapples with the consequences of accounting irregularities of private companies, France and Germany are given license to fabricate accounting illusions.
This also means those countries got a measure of freedom to pursue expansionary fiscal policy that would ordinarily be precluded by the 3% rule.
Is it not remarkable that nobody spoke of cyclical adjustment during the up-swing portion of the economic cycle? This should be labelled as exactly what it is, an accounting sleight of hand. European Commission president Romano Prodi, himself about as much of a budget hawk as you will find in the EU these days, stressed this is 'all the innovation that we can do at this present stage''.
Prodi vows to 'follow the rules'' against budget transgressors.
Well, do not count on it.
Last month, EU monetary affairs commissioner Pedro Solbes told the Italian newspaper la Repubblica it was not true that fines would be slapped on Germany and France if they broke the 3% rule in 2004, the third consecutive year they would be over the line.
Said Solbes: 'The decision to resort to fines as foreseen by the pact is a later step.''
Solbes does not have the authority to impose or reject fines on budget scofflaws. That would take a vote by the finance ministers of the eurozone countries. But his opinion does resonate in Brussels. That he discounts the possibility of fines has to be good news for French president Jacques Chirac. Chirac reasons it would be the height of foolishness for France to raise taxes in the midst of a growth slump. He is a proponent of going the opposite way, lowering taxes.
Meanwhile, German foreign minister Joschka Fischer doubts his country will be fined for missing the target in 2004. He was quoted in the Financial Times Deutschland as saying: 'I am sure the commission will come to an intelligent assessment.''
Fischer, like Chirac, wants the commission not to get in the way of tax cuts intended to spur growth. And that lays it out clearly.
If you believe in fiscal policy as a necessary device to manage modern economies, the budget accord was a bad idea from the start. It paralyses fiscal policy at a time when such measures are most needed.
The best solution would be to junk the agreement once and for all, otherwise the commission will be endlessly involved in a debate over when and for whom the rules can be suspended.
Bloomberg newsroom, New York
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till