Holland Takes Aim at Stability Pact Violators

Today is “Holland Day”! (To read why, see my previous post for today, below.) And this time I have a fairly serious subject to treat, namely the seeming determination on the part of highest Dutch government officials that the Stability and Growth Pact (hereafter just “Stability Pact”), which was added to European law in 1997 and whose key provision is that governments are not allowed to run budget deficits of more than 3% of their GDP, be enforced. When governments violate this rule, they’re supposed to be fined millions of euros by the European Commission; Germany and France are about to violate it for the third year in a row (Italy is also apparently a violator), and, as we’ll see, the Dutch together with some of their friends within the EU want to see those fines applied, even if it happens to be the two most influential countries against which that would happen, the very “motor” of EU development.

This weblog entry also marks a slight change in technique. On those occasions when I’ve undertaken to survey coverage of a given subject within a national press, naturally that has involved gathering together what several of the relevant collection of newspapers have to say. But this time it has to be different – because, surprisingly, most of even the Dutch press has ignored this issue, at least in the materials that they put on-line. The only paper to treat it seriously and in-depth has been the NRC Handelsblad – not surprising, since that is generally taken to be the country’s “most serious” newspaper. (The Dutch “New York Times,” and all that – although you would also have expected that the leading financial newspaper, Het Financiële Dagblad, would also have covered this issue. Actually, I have to assume that it has; the problem is that HFD hides most of its on-line material behind gates that you have to pay to pass, which I’m not yet willing to do.) So what we have here is a series of recent articles from the NRC (plus one surprise entry at the end!) , describing the course of the budding Stability Pact controversy, with one minor crisis point set within the story, and a major one yet to arrive.

The main facts of the case are laid out in the NRC’s article of 10 September: Nederland dreigt met Europese Hof, or “The Netherlands Threatens with the European Court.” Germany, France, and Italy are guilty of violating the Stability Pact’s 3% budget deficit limitation, the first two for three years in a row (once they present their budgets for next year shortly, which everyone assumes will also violate the 3% limit). The Netherlands – primarily in the person of Gerrit Zalm, the Dutch finance minister and leader of the second most-important party in the current coalition, the VVD (free-market liberals) – is seeking to enlist the political help of fellow smallish (but budgetarily well-behaving) states (Greece, Denmark, Austria, and Spain – the last one not-so-small) to call these violators to account. The complaining state does not bring the violating states before the European Court of Justice – no, no, it’s of course the European Commission whose function it is to do that, so that the figure of Commission President Romano Prodi also stands central in this affair. Unfortunately, like a well-meaning mother figure, the Commission in the past has shown a tendency to go to any length, to give in on anything, to keep the peace among member states, which also of course means looking the other way when it comes to Stability Pact violations. (Again, the “big two” EU nations are about to violate that for the third year in a row.) So the task of Zalm and his allies is in the first instance to transplant a little unaccustomed backbone into the body of the Commission.

As the article also sketches, the time-checkpoints ahead that could ultimately lead to a crisis – and/or a decision – are clear: 25 September is when France actually unveils its state budget for the next fiscal year. The actual numbers revealed may not be so important – everybody knows there’s no way the French will make it under the 3% deficit hurdle – but the attitude with which French officials present these results could well be key. Those officials – including Francis Mer, French finance minister (hey! that phrase scans and rhymes most interestingly!) but up to and including the prime minister, Jean-Pierre Raffarin – have in the past not been shy about saying that what they wanted to do with their national budget was of much more interest to them than someone else’s silly rules and deficit thresholds. And on 6 October there will occur a formal meeting of Ecofin, which is the sub-set of the institution known within the EU as the Council of Ministers (i.e. councils of ministers representing their respective governments) at which all finance ministers meet together. That will be the time for some hard decision-making, quite possibly for a recommendation to the Commission that the Stability Pact violators be punished for their transgressions. The fines for each government, this article states, could be up in the neighborhood of €5 billion (that’s American billion – in Europe it is often known instead as the “milliard.”)

Now, maybe you’re an avid EuroSavant reader (which can only mean that you’re my Mom! Hi Mom!) and can recall a past off-hand €S comment about this, or maybe you’ve figured it out for yourself: It makes no sense, when governments are having trouble matching their revenue-raising with their spending, and so get into debt and, if they take it too far, also get into trouble with their EU colleague states and with the European Commission, to then fine them massive amounts in punishment! That only makes their problem worse, i.e. more difficult to solve! And indeed, one of the most notable of quotes coming from Romano Prodi in recent times has been his characterization of the Stability Pact as “stupid.” (You can bet that that his underlings throughout the bureaucracy that is the Commission, whose job it is to take seriously, to monitor, and to uphold the laws and rules created by EU member-states, were really thrilled with him for saying that! Then again, maybe we can be thankful for someone in a high position like that who, when he thinks that the Emperor is in fact wearing no clothes, is willing to state that fact.) He has a good point there – but I also think that now is not the time to discuss it, as giving in in this way will basically function to allow some brazen EU scofflaws (whom one can accuse of blithely violating the Stability Pact because of the invulnerability to sanction they assume that they possess, due to their size and political influence) to get away with their scofflaw behavior. We had a good discussion on this point not so long ago on EuroSavant, spurred by a thoughtful article (as usual) coming from Die Zeit. So I don’t want to get any further into this argument this time; let me just give you a reference to that past entry and then move on.

We move on: to September 12 through 14 (Fri./Sun.), because those were the dates for an informal Ecofin meeting, to be held on the Lago Maggiore in Italy, in the resort town of Stresa. Since it was to be an informal get-together, naturally it could produce no formal decisions or measures – but then again, it was going to be a great opportunity for complaints to be lodged, allies to be recruited, conspiracies to be hatched, and – who knows? – maybe for someone to unexpectedly throw a jacket over Francis Mer’s head in the cloakroom of some ancient Italian castle and proceed to give him the good hazing treatment. (Surely there would be an outstanding dungeon, with a choice selection of medieval torture instruments, available downstairs! That’ll teach him to sneer at the EU!) That sort of thing. In the run-up to that fateful weekend, the NRC (only, as I say) kept up its coverage: Zalm Defends EU-Pact against His Enemies (or maybe “Against Its Enemies,” i.e. the Pact’s enemies – that Dutch possessive there, zijn, is ambiguous.) There we read that, yes, Zalm is determined to act tough. We also read how Wim Duisenberg, current president of the European Central Bank, comes out in public against France and Germany for their fiscal behavior. Then we read how Jean-Claude Trichet, the soon-to-be president of the European Central Bank, also comes out in public against France and Germany. Positive side: He’s French himself! Negative side: He doesn’t actually say “France” or “Germany,” or any variations on those names, in any language, but nonetheless it’s quite clear to all who he’s talking about.

But there are more interesting things there, like how what drives Zalm’s self-righteous rage is not only that he is Dutch (the Dutch, and the Scandinavians, are very good at that), but mainly that he knows all-too-well how the Dutch state has had to, and will have to, scrimp and save so that it makes sure that it stays with a budget deficit of less than 3% itself . (And believe me, after the presentation of the government’s program by the Queen yesterday – that’s why today is “Holland Day” on EuroSavant, by the way – we inhabitants of the Netherlands know that all-too-well ourselves.) Greece, to take another example, also had to basically perform fiscal contortions that would make a yoga-master proud in order to satisfy the economic criteria that allowed it also to adopt the euro; so why do the rules (and the pain) not apply to France/Germany/Italy?

And then this latest article adds an interesting new wrinkle: Zalm is zeroing-in in particular on France. Italy is a Stability Pact violator, or maybe is not if you’re willing to look at certain budget figures while squinting your eyes; Germany is a violator, but if you want to give the Germans an excuse, that old one of re-unification costs might still be valid; but France is a violator and is seemingly even proud of it! Ah-ha! Narrow down your choice of enemy so you can be sure at least of bagging him. Ultimately, I don’t know if that strategy is sustainable – if France were to be fined, how could Germany not be fined, too? But anyway, going into Stresa, it’s France that is in the cross-hairs.

Cut here to an interesting, pre-Stresa opinion piece in the NRC from economics Professor Bovenberg from the (Dutch) University of Tilburg: The Netherlands Must Save the Stability Pact. He notes that “monetary sanctions are not credible” because they rely on political decisions to be invoked. Indeed. What is really needed in theory is European governments spending more than they have in recessions, as they need to, but also spending less than they have during boom years – i.e. wisely saving for that proverbial rainy day. So what is really needed in practice is some independent committee of experts, not only to audit each country’s budget numbers to ensure they’re on the up-and-up (sort of like the Congressional Budget Office in the US), but also to evaluate each country’s budget deficit and, in the light of each country’s specific circumstances, judge whether it is violating the spirit of the Stability Pact, so that we can dispense with that one-size-fits-all letter rule of 3%. But of course such a solution seems impossible for now, so we need to preserve what we’ve got, which is the 3% rule. And it is precisely the Netherlands that should take the lead in defending it, due to its special interest in inter-country financial stability (i.e. here, the stability of the euro, which the French and German and Italian shenanigans do ultimately threaten) as a trading nation, due to its own tradition of monetary discipline (well, sort of – at least as of the beginning of the 1980s, when the Dutch Central Bank informally, but solidly, linked the guilder to the deutsche mark), and due to its emerging role as a leader among the EU’s small nations.

OK that’s fine, you’re probably thinking – but the weekend of Sept. 12/14 is past us now. What happened at Stresa? Did French minister Mer emerge from these consultations sporting any bruises or other physical marks? The NRC covered Stresa’s aftermath as well, of course, in its article France Comes Halfway towards Zalm. Here, the reporting on Minister Mer ignores any contusions he might have had (so that he probably didn’t have any) in favor of the concession he made at Stresa to fellow finance ministers. Before, France’s position was that it couldn’t get under the 3% limit before 2006; now, it promises to do so by 2005. That falls somewhat short in the excitement department, you’re probably thinking (especially when compared with, say, an extracurricular caucus at Stresa with the Iron Maiden), and you’re right. Zalm will by no means let it go at that; the NRC quotes him as only saying that Mer had given “useful indications” (of something – the quote doesn’t say what), but that he still remains dissatisfied. Still, it seems that the French are finally whistling a somewhat different tune about the Stability Pact – who knows how long that will last? (Probably until the threat of actually getting hit with that €5 billion fine has passed.)

Surprisingly, there’s another source available than the NRC to use to fathom Minister Zalm’s current thinking – he has his own weblog! Now, is this a great country, or what? – as long as you know Dutch, of course. (But why wouldn’t you know Dutch?) Note that I don’t say that he writes his own weblog – he’s a busy man (a fact attested to simply by reading the thing), and there is surely no shortage of staffers around to write this for him. (Although I wouldn’t be surprised if he wrote quite a bit of it.) Maybe one of them knows enough HTML to help him out a bit on the site’s layout – there’s an awful lot of wasted space gaping there over on the right, as his text confines itself to a somewhat-thin column over on the left-hand side.

Anyway, after a careful survey of said weblog (its URL declares it the “Zalmlog” – not “Zalmblog,” mind you), all I can retrieve pertaining to the subject at hand is that, indeed, French representatives spent most of their time at Stresa (perhaps with the thought of the dungeon in the back of their minds?) going around emphasizing that they did want to comply with European agreements. “This is a step in the right direction,” Zalm (or his staffer) writes with a satisfied air, although of course it hardly means that he intends to lay off his pressure, on the French in particular.

Otherwise, the blog chats on about being transported multiple times across Lago Maggiore to a castle on an island in the middle of the lake for sumptuous meals, of flying home to the Hague on Sunday morning with Duisenberg, and details like that. Now, if you read his further entry for Monday/Tuesday (15-16 Sept.) he tells about how, right in the middle of his important duties of presenting the government’s new budget, of making speeches, giving interviews, paticipating in ceremonies, etc. one of his daughters gave birth to a healthy baby girl! He got to finally drive to the Hague hospital late Tuesday night to be able to hold it, and wowza-yowza. That might interest some of you out there, but unfortunately such matters lie outside of EuroSavant’s remit, so I’m not going to cover them. You’ve already got the URL; stuff it under your Favorites while you go learn Dutch! (Or else write me an ingratiating e-mail!)

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