It now appears we were not the only ones to be puzzled. In today’s Times, economics writer Anatole Kaletsky also remarks on this phenomenon. "Considering all the fuss back in 1996", he writes, "when the eurozone’s Growth and Stability Pact was shoehorned into the Maastricht treaty by the German Government, the Pact’s final burial last week excited amazingly little comment". The decision "did not even merit a front-page story in the Financial Times".
What follows from Kaletsky is a penetrating analysis of the medium to long-term implications of the judgment. And while he is sometimes a little "wobbly" when he strays into broader political territory, when Kaletsky writes on EU economics, he is very good indeed.
In his piece, he asks whether the euro project is now in serious danger. "Or will Europe create a new fiscal framework much stronger than the collapsed Stability Pact?", he asks. "Will European governments now have more freedom to use Keynesian policies to stimulate their economies? Or will the collapse of the Pact provoke even more deflationary disciplinarian reactions from the European Central Bank (ECB)?"
Kaletsky’s answer to all these questions is "yes". Over the medium and long-term, consequences will be far-reaching and complex.
"The ECB is bound to become even more cautious about easing monetary policy in the face of mass unemployment and inadequate economic growth… exports are likely to weaken as the rising euro takes its toll… and "the eurozone seems set to remain an island of mass unemployment in a booming global economy in the next year or two".
National finance ministers, Kaletsky predicts, "will now start to focus again on their national responsibilities and long-term fiscal objectives", but they will be pressed by the commission to agree on a much more intrusive form of fiscal oversight and permanent EU surveillance. This will
…intensify, rather than ease, the conflict between the EU and member states, and will aggravate the culture of irresponsibility and blame-shifting that has reduced the political legitimacy of economic policy in all euro-zone countries and made controversial economic decisions extremely difficult to implement.Thus, in Kaletsky’s view, the long-term future of the euro project "now looks more perilous than it did a few weeks ago", arising from "…the absence of a politically legitimate European state to regulate the issue of the currency and act as the guardian of its value". Every nation in a currency zone now has an incentive to borrow as much as it can get away with and, in the eurozone, every government is now effectively borrowing in a foreign currency, over which it has no control.
"In the long run", Kaletsky concludes, "a monetary union consisting of sovereign nations with completely independent tax and spending policies is unlikely to be sustainable; the eurozone will either evolve into a full-scale economic federation or break up". Either way, the result will not be pretty.
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