France and Germany, enemies of the EU?

[Bradylama]

http://economist.com/printedition/displaystory.cfm?story_id=2244329

NEVER has a straitjacket seemed so ill-fitting or so insecure. The euro area’s “stability and growth pact” was supposed to stop irresponsible member states running excessive budget deficits, defined as 3% of GDP or more. Chief among the restraints was the threat of large fines if member governments breached the limit for three years in a row. For some time now, no one has seriously believed those restraints would hold. In the early hours of Tuesday November 25th, the euro’s fiscal straitjacket finally came apart at the seams.

The pact’s fate was sealed over an extended dinner meeting of the euro area’s 12 finance ministers. They chewed over the sorry fiscal record of the euro’s two largest members, France and Germany. Both governments ran deficits of more than 3% of GDP last year and will do so again this year. Both expect to breach the limit for the third time in 2004 (see chart below). Earlier this year the European Commission, which polices the pact, agreed to give both countries an extra year, until 2005, to bring their deficits back into line. But it also instructed them to revisit their budget plans for 2004 and make extra cuts. France was asked to cut its underlying, cyclically adjusted deficit by a full 1% of GDP, Germany by 0.8%. Both resisted.

The EU's economics and financial affairs department details the stability and growth pact. Germany's Federal Government and the Federal Statistical Office post the latest economic data. France's Ministry of Economics, Finance and Industry gives some statistics and information in English. The European Central Bank provides monetary-policy information. The Centre for European Reform, a think-tank, publishes research and policy briefs on EU economic policy.

Under the pact’s rules, the commission’s prescriptions have no force until formally endorsed in a vote by the euro area’s finance ministers, known as the “eurogroup”. And the votes were simply not there. Instead, the eurogroup agreed on a set of proposals of its own, drawn up by the Italian finance minister, Giulio Tremonti. France will cut its structural deficit by 0.8% of GDP next year, Germany by 0.6%. In 2005, both will bring their deficits below 3%, economic growth permitting. Nothing will enforce or guarantee this agreement except France and Germany’s word. The European Central Bank (ECB) was alarmed at this outcome, the commission was dismayed, and the smaller euro-area countries who opposed the deal were apoplectic: treaty law was giving way to the “Franco-German steamroller”, as Le Figaro, a French newspaper, put it.

This anger will sour European politics and may spill over into negotiations on a proposed EU constitution. Having thrown their weight around this week, France and Germany may find other, smaller members more reluctant than ever to give ground in the negotiations on the document. The EU's mid-sized countries also hope to capitalise on this ressentiment. Spain opposes the draft constitution because it will give it substantially less voting weight than it currently enjoys. It sided against France and Germany on Tuesday, and will point to their fiscal transgressions to show that the EU's big countries do not deserve the extra power the proposed constitution will give them.

The European Commission is also considering retaliation. It claims that the finance ministers' fudge does not have “an appropriate legal basis” and it may yet consider challenging the decision in court. No one in Paris or Berlin seems that worried, however. “I can only advise the commission to come out of its corner and stop sulking,” said Hans Eichel, Germany's finance minister. That may take some time: Francis Mer, the French finance minister, proposes waiting until 2005 for “the temperature to come down again” before making any decisions about how to improve the euro area's fiscal rules.

There is much room for improvement. The stability pact's parameters, namely the 3% deficit limit, are arbitrary and its procedures, extracting budget cuts or fines even in a recession, are counterproductive. A 3% limit pays no attention to the nominal growth rate of the economy, nor to a government’s stock of liabilities or assets. Despite its toothlessness, the pact wreaked some damage on European fiscal planning. Italy regularly sells off another piece of government silverware to disguise its budget problems. The Germans are having difficulty passing a much-needed tax cut because of fears that it will add to the country’s fiscal woes.

Member governments have found it impossible to live with the pact. But can they live without it? So far, the financial markets seem to think so: for them, ignoring the pact was a less troubling outcome than enforcing it. Now they can look forward to a cyclical recovery in Europe unthreatened by inopportune fiscal rigour. The return of growth should restore most euro-area governments—in France, Germany and elsewhere—to a better fiscal balance. As it does, the hoo-ha over excessive deficits will recede. Indeed, in the immediate future, euro members will probably claim that their fiscal policies are still governed by something they have started calling “the spirit of the pact”.

But will this spirit be enough to sustain faith in the euro in the years ahead? Europe’s central bankers think not. Breaking the pact carries “serious dangers”, they warned on Tueday. The ECB worries that governments are more likely to run deficits in a monetary union. Similar concerns are voiced by smaller members: if the Austrian government borrows too much, its impact on euro-area interest rates is negligible; but if France, Germany or Italy overborrow, borrowing costs rise for everyone. However, not everyone is bothered by this. As economists such as Willem Buiter of the European Bank of Reconstruction and Development point out, in all markets, whether for apples or for capital, a big enough spender will push up the price for everyone else. That is the way markets work.

One option, then, is to leave the policing of government deficits and the pricing of government debt to the markets. Under euro rules, the debt of member governments remains their responsibility and theirs alone. The ECB is prohibited from bailing out member governments by printing money to pay off their debts. But would that prohibition, if tested, fare any better than the stability pact’s prohibition on large deficits? The ECB is certainly better shielded from political pressures than the stability pact is. But if this week has any lesson, it is that anything Europe’s big governments have stitched together, Europe’s big governments can unpick.

How do you think France and Germany's actions will affect the political scene in the EU? Will the Euro plummet out of fiscal distrust?

 

[welsh]

It seems I have set off an evil trend. hmmm.....

Seems politics in the EU is still pretty much a local self-interested game.

 

[Bradylama]

Well of course its a game of self-interest.

But the question is whether or not France and Germany's man-handling of the rules that they themselves set up will lead to many negative effects.

It just proves that the larger nations working in concert can defeat anything. Which is why I doubt the French or Germans would be too keen about the UK joining the EMU.

If France and Germany continue abusing laws they set up in the first place it may eventually lead smaller member nations, which have done their best to abide by the rules, to leave the EU and possibly form their own Federations.

It wouldn't be entirely impossible for Eastern Europe to break off and combine economically. But then who's to say that Poland or the Ukraine wouldn't attempt the same as France or Germany?

 

[welsh]

EU stuff-

http://www.economist.com/agenda/PrinterFriendly.cfm?Story_ID=2295754

A constitution in tatters

Dec 15th 2003
From The Economist print edition


Years of negotiation over a proposed constitution for the European Union collapsed in failure at the weekend. Or, to put it another way, they ended in a victory for good sense

AP


Where’s the bin?



AFTER 18 months’ hard work by the 105 delegates from 25 countries who drafted the proposed constitution for the European Union, followed by months of discussions between national governments, the EU’s leaders gathered in Brussels at the weekend to iron out their remaining differences and agree a final text. But by lunchtime on Saturday December 13th, it had become clear that no agreement was possible on the main sticking-point—member countries’ voting strengths—and the talks collapsed. Now the proposed constitution may not be revived for months, if not years.

To avoid constant stalemates at EU summits as the Union expands (from 15 countries now to 25 in May and perhaps over 30 some day), the final draft of the constitution had proposed a “double-majority” voting system, in which changes to EU law would be passed if more than half of member countries, representing at least 60% of the EU’s population, supported them. But Poland, backed by Spain, objected to this and insisted on keeping the voting arrangements agreed at the Nice summit in 2000, which give them almost as many votes as Germany despite each having only about half its population.

Ironically, the proposition on voting arrangements that sank the draft constitution was one of its more sensible ideas. In most other respects, the document was a disaster. Constitutions are supposed to give citizens a clear and concise explanation of the powers—and the limits to the powers—of the principal organs of government. However, the long, rambling draft produced by the 105-member European Convention was so vague on how it assigned powers to various institutions that at times even convention members themselves could not explain it. And the EU’s principle of “subsidiarity” (devolving decision-making so it is as close to the people as possible), far from being strengthened, was undermined by making it subordinate to the Union’s objectives, which included various types of “cohesion” (read: Brussels-led harmonisation).

As the convention members tried to satisfy everyone, their draft constitution ended up riddled with botched compromises, anomalies and absurdities. For instance, it entrenched in law the EU’s Charter of Fundamental Rights, which gives workers the right to free job-placement help. But then, after British objections, this “fundamental” right was restricted to only about half the EU's workers. Shortly before the summit collapsed on Saturday, Britain’s prime minister, Tony Blair, won agreement to remove from the draft some of the most contentious proposals to increase the EU’s encroachment on national sovereignty. Silvio Berlusconi, the Italian prime minister, who chaired the summit, accepted Mr Blair’s insistence that member countries keep their vetoes on such issues as tax, social security and judicial co-operation, instead of introducing majority voting as the draft constitution had proposed.

Europe’s leaders did not seem terribly upset at the failure of their summit. The Polish prime minister, Leszek Miller, and his Spanish counterpart, José María Aznar, returned home having successfully defended their countries’ voting rights. Mr Blair was no doubt relieved no longer to have to face strong public pressure for a referendum on the constitution, which he might well have lost. Mr Berlusconi brushed aside widespread criticism of his handling of the talks, arguing that they had not been a complete waste of time because agreement had been reached on most points of contention.

There was even a conspiracy theory that France’s president, Jacques Chirac, was happy that the constitution flopped, despite ostensibly pushing for it to be approved. Worried about a loss of influence in an enlarged EU, France is pushing for the formation of a “hard core” of countries, led by itself and Germany, which would forge ahead with deeper integration. As he made clear at the end of the summit, the collapse of the constitutional talks gives Mr Chirac an excuse to pursue this objective.

However, it may be easier said than done. Some proposals, such as unifying the core countries’ criminal-justice systems, present huge challenges. The existing EU treaties limit the ability of any group of member countries to push ahead without the others. Furthermore, both France and Germany have already undermined their credibility as Europe’s leaders by having blatantly breached the EU’s stability pact with their big budget deficits.

Coming at the end of a year in which the EU’s biggest countries were bitterly divided over Iraq, the stability pact was undermined, Sweden rejected joining the euro and Britain put off its currency decision indefinitely, the collapse of the talks has inevitably led to talk of a “crisis” in the Union. Indeed, the chances of reviving the proposal in the short term do not look good. Ireland, which takes over the EU’s rotating presidency in January, seems likely to take a cautious approach. Poland and Spain are unlikely to yield on the question of voting power. If the constitutional issue is pushed into 2005, it might then face the obstacle of a British general election in which it would surely emerge as a key issue.

So it is not impossible to imagine the idea of an EU constitution quietly slipping off the agenda. But there are bound to be efforts to fish it out of the bin and have another try—and they seem more likely than not to succeed at some point. If so, a few years’ delay may be no bad thing. Since one of the constitution’s main purposes was to facilitate the smooth running of an enlarged EU, it seems not such a bad idea to wait a while to see what problems emerge after the ten new members join next May before setting the Union’s governing principles in stone.