February 26, 2021

News Analysis: In Crisis, Reminders of Disputes in Euro’s Founding

EUROPE has never found it easy to define itself, and now it is having more trouble than ever doing so.

When the rules for the euro currency were first drafted 15 years ago, the leaders of France and Germany had to compromise even to agree on the name for the proposal: Berlin wanted a “stability pact,” emphasizing Germanic fiscal discipline, while Paris insisted on adding “growth” to the title to make it more palatable to French voters.

In Paris on Tuesday, the two countries again sought to bury their differences, proposing deeper integration for the single currency in the throes of a ferocious debt crisis.

If carried out, those plans could solidify an economic inner core within a two-tier European Union. But with domestic politics pushing in different directions, and much of the detail left deliberately vague, many proponents of a united Europe remain to be convinced.

“Too little, too uncertain, too late — that has been the regular response of E.U. leaders to the euro zone debt crisis,” argued Sharon Bowles, chairwoman of the Economic and Monetary Affairs Committee of the European Parliament. “The Sarkozy-Merkel proposals of Tuesday broadly fall, once again, into this category.”

Simon Tilford, chief economist at the Center for European Reform in London, called it “a positive step that this debate is taking place in Germany and that there is an acceptance that pooling fiscal authority is a necessary precondition of a lasting conclusion of the crisis.”

“But there is a risk,” he added pointedly, “that in order to sell this to domestic opinion, Germany will extract concessions that will render the whole thing unworkable.”

This is just the latest phase of a debate that has ebbed and flowed over decades of European integration. Indeed, when the rule book for introducing the euro — which came to be known as the Stability and Growth Pact — was being drafted, it was completed only after a fractious summit meeting in Dublin Castle in Ireland in 1996.

The patched-together pact, put in place in advance of the introduction of the single currency in 1999, was criticized by many economists from the start. By 2002, with France complaining about the need for more flexibility to promote growth during downturns, Romano Prodi, then the president of the European Commission, described it as “stupid.”

France put together a coalition, ultimately supported by Germany, that prevented the imposition of sanctions on countries that violated the rule limiting annual budget deficits to 3 percent of a nation’s gross domestic product. France and Germany themselves were among those breaching the limits.

The debt crisis has now brought the debate back to its starting point.

Under the emerging set of proposals being pushed by Germany and France, strict new rules would enforce discipline, including fines for sinning countries, which might also lose certain subsidies. The idea of a European finance ministry has been put forward. Debt brakes would be written into constitutions or national law.

Euro zone leaders would have regular summit meetings presided over by a president who, according to talk within the corridors of power, may also lead meetings of the 17 finance ministers.

That is good news for the top contender, Herman Van Rompuy, the former Belgian prime minister who is president of the European Council, which represents the 27 governments in the European Union, and who has maneuvered skillfully for a greater role in coordinating economic policy.

A new bailout mechanism would grow into a sort of European version of the International Monetary Fund, with a bigger staff and powers to buy bonds on the secondary market. And despite the current opposition of Chancellor Angela Merkel of Germany, common euro bonds — which would put the collective strength and collateral of all the euro area countries behind sovereign debt — could eventually become a reality.

As usual with these deals, however, consensus is elusive.

Germany most wanted the debt brakes and strict surveillance of other euro zone governments, with tough punishment for violators. Under pressure from domestic voters horrified at having to bail out a Greek government that lied about its economic data, Mrs. Merkel needs to persuade Germans that the debt crisis won’t rear its ugly head again. The message at home is that the euro zone economy will be recreated in Germany’s image.

France, meanwhile, insisted on new structures to forge integration, led by the 17 prime ministers and presidents, and pressed hard on issues like harmonizing corporate tax rates.

With an election looming, Nicolas Sarkozy, the French president, wants to cast himself in his home country as the savior of the single currency and the driving force behind European integration. Mr. Sarkozy appropriated the notion of strict fiscal discipline to outflank his socialist opposition by making it a centerpiece of the new plans.

The next few months will determine whether this hastily drawn agreement intended to satisfy multiple constituencies will actually upgrade the euro zone’s creaking, often chaotic, structures into something workable in an era of unforgiving markets.

None of this will be easy. It will fall to Mr. Van Rompuy to produce a coherent set of proposals.

Europe still hasn’t resolved the fundamental question it skirted back in 1996 at Dublin Castle: Is the euro more in need of Germanic fiscal stability or the growth and stimulus policies that France traditionally champions?

“It is not going to help the euro zone,” said Mr. Tilford of the Center for European Reform, if “they enforce unworkable positions on the rest of the euro zone.”

He added, “The markets are concerned about debt levels — but also about growth.”

Article source: http://www.nytimes.com/2011/08/18/business/global/debt-crisis-brings-focus-back-to-early-euro-pact.html?partner=rss&emc=rss

Speak Your Mind