In the wake of Sunday's decision to loosen the rules of the Stability and Growth pact which underpins the euro, opposition voices in Germany are crying foul. But some economists say more flexibility was needed.
The euro just got a little less stable, say critics of the change
Germany was one of the prime architects of the stability pact, worried that the profligate ways of smaller EU members would weaken the common currency's strength. Germany was, at the time of the pact's adoption, about to leave behind its beloved deutschmark, which had been a steady, stable friend of the country for decades.
But over the past months, Germany, along with France and Italy, has been at the forefront of the drive to water down the pact. On Sunday, its efforts bore fruit, and EU ministers agreed on a plan that includes giving Germany special treatment because of the high costs of reunification, which Germany has said is largely to blame for its inability over the past three years to keep its deficit under the three-percent mark required by the original stability pact.
Germany has breached the stability pact rules for the last three years and looks on its way to doing it again.
There's a definite sense of satisfaction coming from German Finance Minister Hans Eichel, who said the reworked pact is "more rational economically [and] more growth friendly," since it takes into consideration the country's economic growth and phases of stagnation.
Eating away at the euro?
But Germany's opposition is calling the compromise set forth by the 25 EU ministers nothing short of disastrous.
"We've all received a clear signal that the euro will not be as strong as the former deutschmark," said Michael Meister, finance spokesman for the conservative Christian Democrats. "What's worse, confidence and trust in the reliability of the European Union is being destroyed on a massive scale only because a few countries – Germany included – are not willing to display budgetary discipline.”
Theo Waigel, finance minister under former Chancellor Helmut Kohl and member of the Bavarian-based Christian Social Union, called the loosening of the pact a "sin against our children" who he said will be left to shoulder the debt of their parents.
Former Finance Minister Theo Waigel, left, with his boss, former Chancellor Helmut Kohl.
Waigel, who was finance minister when the Stability and Growth Pact was adopted in 1997, said the government then had purposefully left out considerations of the cost of reunification in drawing up the agreement.
"Because then we knew we'd have every country citing their own special problems," he said, adding that Germany had now abandoned its position as a leading advocate of euro stability in Europe.
There was criticism on the European level as well. Othmar Karas, an Austrian who represents the European People's Party in Strasburg, said it was a grave mistake to bow to the German government's demand for special treatment over reunification. He called the reunification justification for changing the pact's rules just an excuse, since the financial burden of German reunification started far before the year 2000, when Germany exceeded deficit limits for the first time.
"No, it started 15 years ago, and for most of the time Germany had enough discipline not to let the financial situation get out of control despite the additional burden," he said. "In other words, there’s no justification whatsoever to insist on special treatment now.”
A few voices in favor
Despite the reproaches of opposition politicians and other experts, some German economists have a more sanguine outlook regarding the relaxation of the pact. Most currency analysts said they did not fear a substantial weakening of the euro because of the new rules.
Balloon euro. Will it deflate soon?
Manfred Kurz of the Bavarian State Bank said adding more flexibility to the stability agreement could give countries like Germany more room to develop growth-oriented economic policies.
The president of the Halle Institute for Economic Research, Ulrich Blum, told the Reuters news agency that taking the particular economic difficulties of a country into consideration is not bad policy. "After all, we are shouldering the entire weight of German reunification," he said.
German spends four percent of its gross domestic product on transfers to the former communist eastern part of the country. The government estimates it has transferred 1.5 trillion euros ($2 trillion) since the Berlin wall fell 15 years ago.
Finance Minister Hans Eichel said German reunification was a "unique problem" that needed to be adequately addressed. He said the agreement did not mean German was abandoning the goal of keeping its deficit under three percent of GDP.
"Of course I want to stick to it," he said.
Boost for Schröder
The move by the EU's finance ministers has given Chancellor Gerhard Schröder an economic and political boost at a time when he badly needs it. The government in Berlin is struggling to overcome years of economic stagnation and an unemployment rate that has reached 12.6 percent, a rate not seen since the 1930s.
German Chancellor Gerhard Schroeder, left, with French President Jacques Chirac, another advocate of changing the euro rules.
The pact decision will lessen the likelihood that Germany will face punitive action from Brussels for not keeping its deficit down. The change could inspire hope that the government will have room to spend and perhaps bring the unemployment rate down below the psychologically important number of five million. Schröder's party, the Social Democrats, is facing an important state election on May 22 in its traditional stronghold of North Rhine-Westphalia. It is currently trailing the opposition in opinion polls. A general election is due in September 2006.