The European Union’s fiscal rulebook, known as the stability and growth pact, has fallen into such discredit since the euro’s launch in 1999 that almost any change is likely to be an improvement. But are the reforms that EU finance ministers agreed in Luxembourg on Monday good enough? I have my doubts.
There are many flaws in the stability pact, but the essential problem is enforcement. How can outsiders compel a government, with sovereign control of its budget, to observe fiscal discipline? The pact contains a provision for imposing fines on countries that run up high budget deficits and ignore recommendations from other member-states and the European Commission to take corrective measures. Predictably, however, no country has ever paid a fine or has even been asked to pay a fine throughout the euro’s 11-year history. Governments have shrunk from punishing other governments because they know that the tables may one day be turned on themselves.
In any case, it has always seemed potty to slap fines on a country with a large deficit. The penalties would simply exacerbate the country’s budgetary difficulties. No wonder Romano Prodi, the former Commission president, once called the stability pact “stupid”. Read more