Monday, January 17, 2005

The Pact is dead. Long live the Pact.

The row about the EU Stability Pact neatly shows up the folly of grafting a single currency onto a diverse market.

When it was first mooted, financially "responsible" countries like Germany insisted on the Pact as a means of maintaining discipline and control over "irresponsible" countries like Italy. If Germany was to give up its strong Deutschmark, it wanted guarantees that the euro would be equally strong. That wasn´t a given then; nor, despite its current strength against the dollar, is it a given for the future.

Germany´s turbid economy spoiled the plan. At the moment, Germany desperately needs to return to growth. The last thing its government needs is a strong euro coupled to inflexible restrictions on its ability to act and spend. No use telling Germans that they should have saved when the economy was healthier.

Schroeder´s proposal to water down the Pact is a game attempt to pretend that Europe can carry on along these lines, and the EU Commission has responded to him gratefully.

But they´re all fooling themselves. Europe is now split into two camps: large, debt-incurring, financially spendthrift nations like Germany and France on the one hand; and small, budget-balancing, financially careful countries on the other. Whatever face-saving compromise is cobbled together (and it will be) the Pact is dead. Let´s hope the euro doesn´t follow it anytime soon.

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