It’s Official: France Wins the Budget Deficit Battle

You know that has to be true when the hardest-liner on the side of making France pay a fine for its flouting of the 3%-of-GDP budget deficit limit, Dutch finance minister Gerrit Zalm, finally throws in the towel. That he is now doing so is clear from an interview published in today’s Het Financiële Dagbald (subscription required). The scheduled meeting next Monday evening of EU finance ministers, long thought to be a setting for confrontation, will now merely be a formality as the lenient stance proposed by EU Economic and Monetary Affairs Commissioner Perdo Solbes is approved. Even though for him personally Monday’s meeting is sure to be, as the article puts it, “a long and unpleasant session,” in the end Zalm himself might even vote to approve Solbes’ proposal, if only to head off even more-lenient treatment of the French that some may use that occasion to advance.

That doesn’t mean an end to the issue, though – beside the inevitable fact that Germany will receive the same soft treatment for violating that 3% rule when her case is taken up within a few months. Minister Zalm has concerns about what this will do, at least over the medium-to-long run, to confidence in the euro from consumers and business.

Maybe it’s time to change the Stability Pact, his interviewers suggest? Precisely not, Zalm replies: “If you have an agreement, then you hold yourself to it, unless you change it. [But] if you don’t hold yourself to it in the first place, why should you even change it?” Perhaps change the allowed deficit to 4% of GDP (a suggestion of Italian premier Berlusconi)? Then how do we know governments won’t just up their deficits to 5%? The point to Zalm is to take such agreements seriously in the first place, something that in his view France and Germany have so clearly failed to do. First hold to the agreements you’ve already made – i.e. get below 3% – then we can start talking about changing those agreements. “Why don’t you just go ahead and make it 10%,” said Zalm caustically, “then you’ll have no more problems with it.”

As it turns out, the Netherlands will hold the EU’s rotating presidency in the second half of next year – just the right period to address the question of changing the Stability Pact (clearly, since issues surrounding the EU Constitution and actual accession of the 10 new member-states will preoccupy January through June of 2004). Zalm will thus be in the driver’s seat then, in charge of setting the EU’s financial agenda during that period. On of the things that he really regrets, and that he holds responsible for the present deficit mess among some EU countries, is precisely that during the boom times of the late 1990s larger budget surpluses were not accumulated when those governments had the chance to do so. Instead, er werden allemaal leuke dingen gedaan voor mensen: “there were all sorts of nice things done for people.” So perhaps there needs to be some future tightening of EU governments’ fiscal discretion during fat years as well as lean. But again: First let France and Germany get their houses in order according to the agreement they signed, and only then proceed to change it.

Ultimately, the thing that Zalm really regrets is what has happened with Germany – not so much that Germany has also found itself violating the 3% rule with its budget deficit, but that it now is the leading advocate of a soft approach towards France’s Stability Pact violations. This the same Germany which back not so long ago was the strict EU budget taskmaster and in fact leading protagonist of the Stability Pact in the first place. Together with the Netherlands, that is: “We were the first to consult about it [i.e. the necessity for such a Pact]. We did much together for it, and it ultimately came to fruition in Amsterdam. [So it’s the “Amsterdam Stability Pact”!] That was always a really strong combination.”

But now only half of it is left, the Dutch half which has much less weight to throw around concerning EU matters, no matter how much it may be in the right according to the strict letter of the law. And certainly with insufficient weight to prevent France from receiving more than the slap on the wrist that is scheduled to be administered next Monday.

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