Tuesday, August 31, 2004

Another fudge in the making

In January of this year, when the commission decided to refer the failure of the Council to censure France and Germany for failing to abide by the Growth and Stability pact, I was interviewed by BBC News 24, and asked what would happen to the pact.

My suggestion was that the commission would somehow fudge it, changing the rules to make it easier for the errant countries to comply. I remember the interviewer’s response very well: "I thought you would say that", she said.

And so it comes to pass that the commission is on Friday to unveil proposals to reform pact, with monetary affairs commissioner Joaquin Almunia keen to stress that he is not just making the rules more flexible. In other words, he is making the rules more "flexible" – and a fudge is in the making.

It seems the proposals will allow for debt levels and policy decisions to be taken into account when applying the rules, with a new definition of “exceptional circumstances”, which will allow defaulting countries to claim economic stagnation as a reason for not balancing the books in the short-term, provided they promise to balance them in the medium term.

Surprise, surprise, Germany – with its deficit likely to end this year above four percent - is likely to benefit most from this re-definition and will slip gracefully off the hook on which it is impaled, and which it devised in the first place.

As for the growth and stability pact, this was actually devised to underpin the credibility of the euro but all this latest proposal might achieve is to confirm the ingenuity of the commission in bending the rules when it finds that the bigger players can't – or won't – obey them.

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