LONDON: No prizes for remembering which British Labour prime minister once solemnly told his party conference that you cannot spend your way out of a recession. With those words in 1976, Jim Callaghan anticipated two decades of neo-liberal orthodoxy in thinking about money, budgets and unemployment.

But the “punk monetarists” (the phrase coined by Callaghan’s chancellor Denis Healey before he, too, collapsed into late 70s confusion) have themselves long passed into history’s twilight. Don’t tell Gordon Brown, but the US has cut interest rates and is running a budget deficit, for all the world as if John Maynard Keynes were a key adviser on Pennsylvania Avenue.

And now France, Germany and Italy are doing precisely what Callaghan said you couldn’t: spending to stimulate economic activity. Economic growth in the year to January 2002 was minus 0.2 per cent in Germany and barely 0.2 per cent in Italy. Unemployment rates are respectively 9.7 per cent and 9.1 per cent. The need for remedial action is obvious. And it is happening. In Paris, Berlin and Rome, governments are spending much more than they are getting in taxes. On the table in addition are tax cuts and capital projects.

Keynes is not getting much credit, however. It is as if recovery thanks to state spending were shameful. The other day Gerhard Schroeder, the German chancellor, said convolutely that spending on flood relief and in the Elbe valley “will lead to investment which will have positive consequences”. The reason this Social Democrat could not speak straight is that deficits have become taboo, under censure by Brussels in the name of the quasi-religious stability pact.

Here is a mighty paradox. The euro was created in a climate of economic orthodoxy (and upswing). Thatcherite opposition to the Maastricht treaty was puzzling. Didn’t it embody precisely the principles the Tories had striven to apply at home, especially a great fear of deficits in the public accounts? If a country goes into the red above 3 per cent of its GDP, it will be forced to put up VAT to boost revenues and so cut the deficit. The rule book says, come what may, eurozone members must balance their books by 2004. And, say Wim Duisenberg and his central bank colleagues, mere discussion of the sanity of these rules in the trough of a recession is forbidden because it will frighten the markets.

The chart shows the powerhouse European countries, France, Italy and Germany, all running big deficits. That’s before the cost of the floods and tax cuts (promised in France and Italy) are factored in. No wonder there is now a tense, if unspoken, contradiction between national political priorities and the pact’s ordinances. This is bigger than parties. The triumph of the centre right in France has made fiscal matters “worse” from Brussels’ viewpoint.

If Edmund Stoiber were elected chancellor, the German arithmetic would be pretty much the same for at least the next two years. But the rhetoric still says the pact is sacrosanct.

The pact has done two things, neither of which is pretty. First, it has bred a culture of deceit in public accounting which Eurostat, the official EU statistics agency, has more or less been forced to accept. That is partly because it does not have enough staff, partly because it ultimately relies on the finance ministries in member countries being completely scrupulous.

Few would disagree with the need for structural change in French, German and Italian labour markets to make employment easier. But “flexibility” will not help today’s jobless much; government spending might. The classical objection to deficits was that they stimulated inflation. But inflation in Germany is only one per cent (lower than in the US). There is huge spare capacity. —Dawn/The Guardian News Service.