With bombs in Baghdad and Istanbul, nukes in Iran, and a "rose revolution" in Georgia, it's easy to miss the news that the European Union just threw away the rulebook governing the euro. Newspapers across the continent slammed the decision by the 12 eurozone finance ministers to allow the two largest members, France and Germany, to get away scot-free with breaking the spending pact that holds the euro together.
Nearly every European paper said this is bad news. The economics of currency zones are usually too abstruse for general interest papers, but few pundits—not even German and French ones—minced words in criticizing the decision to ignore a request to discipline the two largest eurozone members. EU members decided to overlook Berlin's and Paris' flagrant violations of the 1997 Stability and Growth Pact, which restricts overspending by national governments. To read Le Monde, you'd think Germany had just reoccupied Paris *; the decision "has opened a European crisis without precedent," the paper wrote. Meanwhile, Paris' Nouvel Observateurused language more usually associated with American neocons: "French arrogance has never been in such rude health."
Germany's Frankfurter Allgemeine Zeitung called the decision "irresponsible," deploying a somewhat tortuous metaphor: "France and Germany threw themselves against the security fence of the currency union and pulled the security personnel, the EU Commission, to the ground." The European Commission, the EU's executive body in Brussels, had recommended disciplinary action—which could have meant billions in fines—if Paris and Berlin did not get their spending under control immediately. In the European Union's complex rule-making structure, a meeting of national finance ministers can effectively overrule most decisions coming from Brussels. In this case, member states basically chose to ignore an unambiguous judgment by the government of the European Union.
The upper limit on deficit spending by euroland national governments, 3 percent of GDP or less, was agreed upon at a pre-euro summit in Amsterdam in 1997. Since then, EU leaders have openly called for the revision on the pact, with even Romano Prodi, the European Commission president, calling it "stupid." Paris and Berlin have breached the deficit limit for three years running. There is little question now as to its survival; the question is what, if anything, replaces it.
Even the legality of the decision is in question, a fact that might precipitate a "constitutional crisis" if only Europe could agree on a constitution. (The outrage generated by the decision is unlikely to make that project any easier, with smaller states in the 2004 accession line already perceiving a double standard.) Officials at the European Central Bank also sounded the alarm and suggested a legal challenge might be in order, and Die Weltsaid unambiguously, "Germany has broken the law and destroyed trust, not just at home but across Europe."
"France and Germany have secured a Pyrrhic victory," wrote Spain's El Mundo. "They have won, but the cost of their triumph will be tremendous." The rules governing national deficits are important because fiscal stability is vital to the survival of a common currency. Ironically, six years ago it was Germany that insisted on the rules, out of fear that it would have to bail out other eurozone nations that ran up huge debts.
London's Daily Telegraph had the roll call: "In the formal show of hands later, only Holland, Austria, Finland and Spain voted to uphold treaty law, although Belgium, Sweden, Denmark and Greece voted for a lesser condemnation." In a compromise, Germany and France pledged to get their deficits in order by 2005; Germany's pledge, however, is contingent upon meeting Brussels' growth forecasts. The Dutch led the hard-line camp, the Guardian reported. Italy brokered the deal, said Reuters, following a rancorous late-night negotiating session that started Monday.
The Guardian worried about the precedent set for aspiring EU members from the east who are expected to join the club in May 2004. "Many of the countries planning to join the EU next year and the euro at some future date will also be asking questions about why they should set their finances in order to meet the rules when Europe's heavy hitters, France and Germany, are apparently exempt."