“The Sinners are We”

That’s the title of an interesting commentary piece in the latest Die Zeit by Uwe Jean Heuser – a remarkable mea culpa for Germany from a German writer, which puts into stark relief the striking (if rather unfortunate) ironies attending the birth of the Euro and the current state of finances in Euroland (that is, in those twelve-out-of-fifteen EU countries that have adopted it as their common currency).

It’s all about that “Stability Pact,” the agreement forced through as an accompaniment to the introduction of the Euro which constrained all participating governments to keep their budget deficits at 3% of GDP or below, or be punished with fines. For while the currency would be in common use and subject to a uniform monetary policy (run by the European Central Bank in Frankfurt), fiscal policy would still be decided upon by individual governments. By going to heavily into debt, individual governments could cynically take advantage of the financial health the euro gained by being sponsored by all the governments and being supervised by the ECB; if too many of them did that, they would end up spoiling that financial health of the currency for everyone else. This Stability Pact was enacted above all due to the insistence of Germany (specifically, the CDU/CSU government of the time of Helmut Kohl); yet it is now Germany that has violated its terms over the past few years and, with a projected budget deficit of 3.8% of GDP for the next fiscal year (regarded as an under-estimate), will continue doing so.

That is of course highly ironic, but that’s the irony everyone already knows about. Yes, fines are supposed to ensue against governments that violate the Stability Pact, but that is not likely to happen anytime soon, given that not only the EU’s largest country and dominant economic power is the one doing the violating, but that it is also joined in its guilty state by France – and everyone knows that it is the Germans and the French who between them function as the “motor” driving most of what the EU does. (One would like to think that another reason that the fines will not be assessed anytime soon is that doing so is completely illogical: a country would be punished for having an excess of financial outlays over tax receipts by being hit with massive new, mandatory outlays – “mandatory” in the sense that refusing to pay them would plunge the European Union into a serious crisis over such a brazen defiance of its authority.)

No, a more subtle irony that Heuser writes about in this article is the very real difference between the German and French attitudes towards their guilt in this matter. Here is where you can cue Max Weber and other social philosophers who have written about differences between societies caused by their different religious backgrounds: While the French cheerfully own up to violating the Stability Pact (we’ve got more important things to worry about, they say), there is much more of a sense of guilty Angst over their violation coming from the Germans. Again, the Pact was their idea in the first place, arising from a certain self-righteousness over the inevitable fiscal laziness that could be expected from those ne’er-do-well Latin countries with which it was supposed to share the euro. The Germans would now dearly like to level some good self-righteous criticism at what other governments are up to themselves on the fiscal front – Italy, Heuser writes, avoids violating the Stability Pact’s 3% threshold only through shady government accounting tricks – but of course, being highly guilty themselves, they can say nothing.

Thus, such tricks go on unpunished, and what is thereby undermined is the entire regime of trust among Euroland states that the Germans originally tried to explicitly codify with the Stability Pact – the trust that your fellow governments would tax and spend responsibly, just as your government itself was expected to do, so as to keep the euro a healthy, strong currency for all who chose to adopt it as their own. As Heuser points out, the undermining of this trust is particularly unwelcome as other members of the EU, outside “Euroland,” contemplate adopting the euro – particularly Sweden, which has a national referendum on this question next week. These troubles are reflected in recent rhetoric coming from Swedish prime minister Goran Persson to the effect that, even if the referendum turns out a “Yes” result, that won’t mean automatic Swedish adoption of the euro but only careful analysis of the terms offered and the state of the currency regime to see whether the Swedish government really thinks that that’s the best step. Together with the claims of “No” advocates that a “No” would not be final, there can always be future referenda, this turns out to mean that (as the Economist – subscription required – recently noted) that “both a yes and a no vote may actually mean ‘wait and see.'”

(That upcoming referendum – to occur next Sunday, the 14th – should be interesting to cover for EuroSavant. I don’t read Swedish, but I read Danish, and the Danish point of view should be interesting in that the Danes also don’t use the euro and have had – and will have – a referendum on the issue of whether to join the Euro-zone. The German point-of-view as well; do they, or the French, feel any guilt at spoiling the euro’s economic attractiveness by their behavior?)

Such a regime of mutual confidence in your neighbor’s fiscal responsibility is desirable, of course, although Heuser makes a good case that the strict “3% rule” of the Stability Pact is not the best way to get there. It’s easy to think of examples of how countries can run a budget deficit of more than 3% justifiably – in a serious economic downturn, for example, or for major infrastructure spending. He calls for some unbiased Euro-committee (the European Commission itself he judges as too biased) to monitor Euro-member countries’ fiscal behavior and blow the whistle when they are truly violating the Stability Pact’s spirit, even as its letter is much too rigid.

Germany, and particularly France, have of course pointed out that the Stability Pact’s 3% rule is lousy. But they would say that, wouldn’t they? – they’re violating it, and want to take off some of the heat they’re getting for doing so. In Heuser’s final irony, the 3% rule does need to be gotten rid of, but not now, because when major EU members are violating it that sends the wrong message and we can rest assured that those seeking its removal are doing so for the wrong reasons. Rather, right now the 3% rule needs to be obeyed, i.e. Germany and France both need to do the painful political things (cuts in government salaries and services, raises in taxes) that it takes to get back on the allowed side of that threshold. Only then can one speak of modifying the rule. But the general European economic situation, plus the political struggles both France and Germany have already gone through just trying to rein in some of the most egregious government spending (e.g. French public sector workers being allowed to retire much earlier than those in the private sector), mean that that is a question for consideration only far into the future.

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