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Mon, Dec 20, 2004 - Page 12 News List

Euro members move their fiscal goalposts

CRACKS SHOWING With the euro's stability and growth pact in tatters and the most powerful nations flouting rules, the question is whether the single currency is working


Brussels fudge: it's not Belgium's best-known export, but it was a welcome early Christmas present in Paris and Berlin last week. France and Germany have repeatedly flouted the rules that are meant to keep members of the euro in check but on Tuesday the European Commission caved in to the club's most powerful members, and decided to turn a blind eye for another year.

The commission's ruling, which rubber-stamped a decision by eurozone finance ministers, confirmed that the stability and growth pact, the euro's fiscal rulebook, is in tat-ters. The pact commits euro members to keeping their budget deficits strictly below 3 percent; but by the end of the year Germany will have broken that rule for three years in succession, and so will France.

Greece recently unveiled revised budget figures that showed that its deficits were so big it would never have been allowed to join the euro in the first place if the truth had been revealed: It has broken the 3 percent rule every year since 1997. In Italy, Prime Minister Silvio Berlusconi is determined to cut taxes despite already running a deficit well above the 3 percent threshold.

"The problem with the stability and growth pact is that nobody believes the figures any more," says David Brown, chief European economist at Bear Stearns.

"The history of the last three to four years has been one of fiscal fudge and moving the goalposts," he said.

Meanwhile, in Frankfurt, the European Central Bank (ECB), which has never disguised its fury at governments' lax interpretation of the stability pact, has also had to watch impotently over the last two months as the foreign exchange markets have forced up the price of the euro, at a pace that ECB President Jean-Claude Trichet has called "brutal."

Growth in the 12-member zone slowed to 0.3 percent in the third quarter of this year, after a promising start in the first quarter when it expanded by 0.7 percent. Three years after the eurozone's 300 million consumers began to carry euro notes and coins in their purses and pockets, the fudging of the pact, together with the sickly performance of the euro-economy, renews questions about whether the single currency is working.

As analysts hurriedly revise down their forecasts for growth in the eurozone next year, governments in its 12 capitals are blaming the ECB for failing to cut interest rates and boost growth -- while the ECB has repeatedly called on finance ministers to carry out economic reforms rather than rely on monetary policy to rescue them.

"The whole thing's a stand-off," Brown says. "The ECB's putting pressure on eurozone finance ministers to cut their budgets, and the finance ministers are putting pressure on the ECB to cut rates: You're left with an impasse."

He says the ECB's latest press conference, at which Trichet said the bank had considered raising interest rates, despite the potentially damaging surge in the euro, showed how out of touch the eurozone's central bankers have become.

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