The row over fiscal discipline in Europe came closer to boiling point last week, with both sides turning up the heat in the long-running battle over the euro area's budget rule book, the European Stability and Growth Pact.
Two issues lie at the heart of the row: should treaty rules be respected and does heavy deficit spending help or damage growth.
For 10 years, since the Maastricht treaty on economic and monetary union (EMU) was launched preparing for the creation of the euro, euro-zone countries have known that they had to reduce deficits to 3 percent of output, a condition of membership.
The later Stability and Growth Pact, intended to ensure that countries, having joined, did not fall back into inflationary borrow-and-spend policies, required euro-zone countries to work towards a surplus in times of growth, with the deficit ceiling as a fallback in recession.
Flouting the rules
While France and Germany, the countries with the loosest purse strings in the single currency area, openly advocated flouting the very same rules they had been instrumental in drawing up, the EU Commission and the European Central Bank (ECB) stepped up the campaign not to let the budgetary sinners off the hook.
The controversy is not new. Berlin and Paris, their economies entrenched in near-zero growth, have long been calling for a loosening of the tight corset of rules that keeps Europe's finances in place in the hope of freeing up much-needed cash to pump into the economy.
Under the terms of the stability pact, euro-zone members are not allowed to run up public deficits in excess of 3 percent of GDP on pain of heavy financial penalties.
However, both the German and French deficits overran that limit last year and look set to do again not only this year, but next year as well.
By contrast, the stability pact's supporters insist that fiscal laxity hurts rather than helps the prospects for growth and employment in the region in the long run.
But the battle of wills appeared to enter a new phase this week, with both the euro zone's big spenders and the rulebook-waving monetary authorities sharpening their tone in the ongoing war of words.
Battle of wills
Taking the populist tack, French Prime Minister Jean-Pierre Raffarin went for the jugular in French television last Wednesday.
"My first duty is employment and not to solve accounting equations and do mathematical problems until some office or other in some country or other is satisfied," he raged.
When EU Trade Commissioner Pascal Lamy, a Frenchman, reminded Raffarin that the EU Commission had already bowed earlier this year to calls for some flexibility of interpretation and that France should now respect the rules or risk fines, the prime minister told him to mind his own business.
German Chancellor Gerhard Schroeder was less inflammatory than Raffarin, but said more or less the same thing when he argued that the budget rules should be stuck to, but not at the cost of economic growth.
"What we're saying is that there can be situations in which the 3 percent limit is kept to where possible, but not at the price of choking off all economic reason," Schroeder told a parliamentary debate, also last Wednesday.
The irony of such comments is hard to miss, coming from a country which penned the 1997 stability pact in the first place, fearful that if spendthriftier southern European countries joined the euro-club they could undermine the strength of the single currency.
And for the ECB, such reasoning turned the philosophy behind the stability pact completely on its head.
The arguments "miss the point completely," said the bank's chief economist Otmar Issing.
"The pact was called the stability and pact growth pact on the conviction that solid fiscal policies were good for growth. The idea that a higher deficit will spur growth completely contradicts the philosophy of the pact," he said in a newspaper interview.
"Indeed, a whole range of studies show that the consolidation of public finances and a reduction of the deficit, if handled properly, will boost growth not hamper it," Issing said.
The ECB's next president, Bank of France governor Jean-Claude Trichet, also said in Brussels last Thursday that in the long run, soaring deficits would actually undermine the euro zone's ability to grow and create jobs.
Cause for concern
And EU Commission head Romano Prodi even put in a phone call to Raffarin last week, expressing concern about the soaring French deficit and urging a solution to be found within the framework of the stability pact.
The persistent calls by France and Germany for greater pragmatism and "flexibility" in the implementation of the stability pact rules is not only raising hackles at the EU Commission in Brussels and the ECB in Frankfurt.
It could also spark tensions with the smaller euro-zone partners which have already taken painful measures to get their finances in order, because it would likely be taken as arrogant rule-bending by the region's economic heavyweights.
And it could provide a precedent for countries preparing to join the EU: it has already intruded into the Swedish referendum debate.
The debate about softening the rules was therefore putting the credibility of the entire European project at stake, warned Issing.
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