EU finance ministers have agreed to reform the rules underpinning the euro. But in doing so, the floodgates have been opened for reinterpreting the regulations meant to ensure budgetary discipline and a stable currency.
The euro's strength doesn't necessarily reflect confidence in it
Let's be honest. Rarely do sinners decide to punish themselves. In that respect, establishing the European Stability and Growth Pact -- which Germany successfully made a condition for abolishing the deutsche mark -- was defective from the start, for there were and are many sinners. Countries like Greece or Italy would never have been allowed to join the euro club if the Maastricht Treaty's convergence criteria had been applied verbatim. France violated the treaty from 2002-2004. Portugal did so in 2001. The Netherlands breached it in 2003. Greece swindled its way through every year. And Germany, the pact's initiator, hasn't kept its public debts below the ceiling of 3 percent of GDP since 2002.
If the heads of government sign the deal their finance ministers agreed to Monday evening, the Stability Pact will remain formally valid -- the 3 percent cap and the deficit limit of 60 percent of GDP annually will go untouched. But, in reality, the pact will have degenerated into an arbitrary document. The European Commission -- which is meant to police compliance to the deficit caps -- will be instructed to take into account exceptional circumstances when they consider exacting disciplinary measures for deficit breaches. Thus, the German finance minister, for example, will be able to claim the costs of developing eastern Germany as a special burden -- and other states will follow and use their imaginations to devise new exceptional circumstances.
Loosening the Stability Pact isn't a license to make debts, says Germany's finance minister -- but that's how it will be understood in the euro zone. The idea of the Stability Pact is dead. The idea was that the Maastricht Treaty's admission criteria would be made permanent to encourage budgetary discipline. The idea was that future generations wouldn't be left with a mountain of debt. The idea was to show the rest of the world that the euro zone had an elementary interest in ensuring a strong and stable euro.
Little remains of these ideas. And you don't need much imagination to predict where political discussions will take us in the coming years, namely, examining what can be considered euro-zone admission criteria. Can't spending on research and education be included? Can France bring to bear its developmental aid? Don't investments in infrastructure count since they're meant to serve future generations? The floodgates are open for wrangling in Brussels.
All the same, the euro zone can point to the fact that its currency has become strong and stable -- even without budgetary discipline on the part of its member countries. However, this impression is misleading. The euro is currently sought-after on the currency markets only because many investors are concerned about the US twin deficit and are consequently avoiding the dollar. But they certainly aren't asking for the euro because they're impressed by the euro zone's budgetary discipline. For that is surely nothing to marvel at.