Reading accounts of the deal agreed between Nicolas Sarkozy and Angela Merkel last night to impose new rules on EU countries to guarantee fiscal discipline, you might think the two countries were uniting to save the Eurozone from its more profligate members.
But which two countries first broke the rule that deficits should not go above 3 per cent of GDP? It was France and Germany, back in 2003. What’s more, the two then united to make sure that they wouldn’t face sanctions for doing so – effectively destroying the rules (known as the “growth and stability pact”) altogether.
What’s more, they were supported in this action by the UK (otherwise known as the country that like to lecture others on fiscal discipline). Gordon Brown was chancellor at the time.
Here’s what George Parker, now the FT’s political editor, wrote (highly presciently) at the time:
The growth and stability pact may not be mourned by many but the eurozone needs fiscal discipline. The political mood ahead of next month’s intergovernmental conference makes a quick fix unlikely.
France and Germany won: they usually do. But the European Union is assessing the damage of a joyless victory, secured in the small hours of Tuesday morning, that did much more than shred the EU’s fiscal rulebook.
After more than a year of rancour, France and Germany at last cowed EU finance ministers into suspending the sanctions mechanism of the stability and growth pact, letting them off the hook for repeatedly running big budget deficits.
The fiscal prop supporting Europe’s monetary union was knocked away. The message was clear: the European Union has rules, but not everyone has to obey them. France and Germany, long seen as the driving force behind European integration, looked more like a pair of playground bullies. The resulting bitter divisions could have profound effects on the EU’s development.
The economic impact will be clear only in the longer term. While the euro has risen to record highs against the dollar throughout the pact’s protracted demise, fiscal indiscipline may eventually mean higher inflation and long-term interest rates. The European Central Bank warned this week of “serious dangers” ahead.