Off the Hook Again

Now since nothing in life ever comes entirely free, a post to balance my last one (as we say in Spain: one hot one and one cold one). The French are to be given an extra year to get their fiscal act together. This is more a sign of impotence than a seal of approval. In the end I agree with this approach, there is really nothing – except ridicule – to be gained from imposing a symobolic fine. But the point is that this should not be necessary. Everything here seems to be calculated. But still Austria, the Netherlands and Finland don’t seem too happy. So how fine is the calculation? How often can you take advantage of the impotence of the other before a limit is reached? I have no answer to this, but I know the answer is out there somewhere. I guess we’d better all just hope the EU Commission growth provisions are fulfilled, and that we aren’t going to see an even worse re-run of this next year.

France is set to be given an extra year to comply with the EU’s budget rules, after Francis Mer, finance minister, indicated he will make extra efforts to trim his country’s record budget deficit.

A majority of European finance ministers now admit there is nothing they can do to stop President Jacques Chirac’s government from breaking the EU’s stability and growth pact for a third successive year in 2004.

Diplomats yesterday con ceded that France will have to be given until 2005 to comply with the rules, but they still expect Mr Mer to offer something in return. Paris will escape fines potentially worth billions of euros.

French officials expect Mr Mer to make his peace offering next month, agreeing to European Commission requests to cut further France’s underlying deficit and to make additional structural reforms.

The modest concessions will be a belated signal that France is conscious of its responsibilities to other eurozone countries to keep its deficit under control.

But they do nothing to disguise the fact that the stability pact – once a feared instrument of fiscal discipline – has been exposed as largely toothless.

Diplomats said that Mr Mer gave a “conciliatory” presentation of his 2004 budget to his 11 fellow members of the eurogroup – the informal gathering of single currency finance ministers – over dinner in Luxembourg on Monday night.

“A lot of member states had felt the French weren’t taking it [the breach] seriously . . . but that’s not the case anymore,” said Charlie McCreevy, Irish finance minister.

By yesterday it was clear that almost all the finance ministers were now resigned to a “flexible” interpretation of the pact in relation to France. Only Austria, the Netherlands and to a lesser extent Finland maintained a hard line, suggesting the Commission should apply the pact ruthlessly and press for sanctions against France if necessary.

“The outcome of the dinner was that everyone agreed we must try to find a reasonable solution to this problem,” a French government spokesman said.

Diplomats from other EU countries expect the Commission to propose this month that France tightens its structural deficit by about 1 per cent – slightly more than the 0.7 per cent currently proposed – and to make further economic and social reforms.

They expect Mr Mer to comply with the request before the end of the year, although it will not be enough to bring the French deficit below the stability pact ceiling of 3 per cent of GDP. Mr Mer’s tone, in sharp contrast to some bullishly nationalistic performances at past eurogroup meetings, has persuaded countries such as Spain and Belgium to adopt a softer approach towards France.

Hans Eichel, German finance minister, also welcomed the change of tone. “It is very satisfactory that France has clearly committed itself to the [EU budget rules], to the discussions and recommendations within Ecofin . . . and wants to do everything to stay within the framework,” he said.

Mr Eichel’s own budget deficit is expected to exceed 3 per cent for a third successive year in 2004, but he has stayed out of the line of fire by making it clear that he would do his best to observe the rules.
Source: The Financial Times

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

5 thoughts on “Off the Hook Again

  1. Were there no voices that, before the establishment of the convergence criteria, already claimed the propositions that set them were badly done?

    DSW

  2. Good point, of course there were. In particular there was an important group of German economists that was completely opposed to the whole thing. In addition, everyone imagined we would have more growth. No-one who matters really foresaw this protracted downturn.

    The pact is obviously a blunt instrument, the difficult question is what could replace it.But there are two questions here.

    The first is the future of the pact, but the second, and I happen to think that this is the most important of the two as far as the future of the EU goes, is the attitude you have to decisions once they have been taken.

    Germany certainly gives the impression of trying harder to make the effort to comply.

  3. Most important on the issue of “attitude to decisions once they have been taken.” is that you can not simply revert to them; you have to go on argueing.
    Because of the necessity to acquire and retain public support AND because of the changes in (economical) reality.

  4. Frans, the euro is an experiment, and you can’t know in advance all the problems you will find (although more of the problems could have been – and were by the crtics – anticipated). So you need to be able to evolve and adapt. My point is that what is important here is the way you are seen to do this. Head-in-the-sandism a la Duisenberg and Otmar Issing isn’t constructive, but neither is the administrative ‘fix’ accompanied by spin.

    What I am suggesting is that some countries may well go to a popular vote on the proposed constitution, and some may well vote against based on perceptions about how the stability pact has been handled (your own Netherlands comes to mind here), and this would be a sad situation to be in.

    There seems to be a consensus here in Europe that what George Bush is doing in the US is fiscally irresponsible, but there seems to be a lot less appreciation of our own present dangers. Is this because it is easier to see mistakes in others?

    As I said in the post, we’d just better hope the growth numbers turn upwards in the next few years, hadn’t we.

  5. “There seems to be a consensus here in Europe that what George Bush is doing in the US is fiscally irresponsible, but there seems to be a lot less appreciation of our own present dangers. Is this because it is easier to see mistakes in others?”

    The irony of that “fiscal irresponsibility” is that, since the rest of the world has allowed their economies become dependent on the American consumer, it behooves them to make sure the American consumer continues to have the after-tax money in their pockets to continue spending. A rise in taxes in the US – as insisted by the Democrats – will ultimately hurt European exporters, as well as Asian exporters.

    In the end, the world has no choice but to lend to the US. And that they certainly have been doing….

    If Europe had the courage, they would scale down the welfare state and transform their continent into a consumers’ paradise. That would be the surest way to rival the US in worldwide power.