BRUSSELS, Feb 16: European Union policymakers are putting a brave face on their governments’ decision last week to spare Germany a humbling formal rebuke on its rising budget deficit. No problem, eurozone rules are still intact, says European Monetary Affairs Commissioner Pedro Solbes who made EU history last month by calling on governments to issue Berlin with an early budgetary warning. The credibility of the euro is not in danger. We will use the procedure again if needed, adds European Commission President Romano Prodi.
But a few are fooled. Germany’s budget deficit of 2.7 per cent of gross domestic product merited an early warning reprimand for being too close to the 3 per cent threshold imposed by the eurozone’s 1997 growth and stability pact forged as it so happens under pressure from Berlin.
Germany’s narrow escape from EU censure was the result of a deliberate political decision by the bloc’s finance ministers. Political expediency was put ahead of principle - for many reasons. Germany is not just Europe’s largest and most populous nation, it is also the eurozone’s economic and political motor and the largest contributor to the EU budget. Chancellor Gerhard Schroeder faces difficult elections in September. Most vitally, when a newly assertive Germany stands up and speaks out its mind, its EU partners have no choice but to listen.
As German Foreign Minister Joschka Fischer pointed out, “it can’t be right that you tell Germany, the biggest net contributor, you’re not allowed to do this, you’re not allowed to do that, loading it down with additional burdens and then point an accusing finger because of the budget deficit.”
Schroeder and Germany are not just angry about Commissioner Solbes’ gall in suggesting Berlin could be reprimanded. Berlin is also showing its muscle inside the EU in many other ways. In recent weeks, Schroeder has warned Brussels he is unhappy with Commission proposals for new rules for selling cars because they may hit the market shares of German car producers. Germany is also grumbling at Commission estimates at the 42 billion euro bill for future EU eastward enlargement, fearing it will have to pay even more into EU coffers.
By putting politics ahead of economic strictures, EU governments have created an unfortunate precedent. The message is clear: big EU nations have clout and can wriggle out of uncomfortable corners. Small countries - like Ireland which was reprimanded by its European partners last year for spending too much - can expect no such leniency.
Another key signal: eurozone rules, including the 1997 growth and stability pact designed to keep eurozone members on the straight and narrow financial path can be bent, twisted and loosened to suit the interests of Europe’s big powers.
German opposition Christian Democrat leader Angela Merkel is not too far out in protesting at the ‘scandal’ allowing Germany to use ‘political pressure’ to avoid an early warning from Brussels.
Having spotlighted the primacy of politics in eurozone affairs, EU ministers have also raised questions about how much transparency and political manoeuvring will go in to upcoming deliberations on the choice of a successor to Wim Duisenberg, European Central Bank president, who is set to retire in July next year.
To be fair, however, Germany has not got off completely scot-free. German Finance Minister Hans Eichel has made a raft of pledges to keep a tight rein on spending despite upcoming elections. “There will be no election gifts,” Eichel warned in Brussels. Taxes would not be lowered, he insisted, and government expenditure would be kept under strict controls despite opposition attacks on Berlin’s financial controls.
Still, the eurozone’s once-sacrosanct growth and stability pact has been dealt a tough blow. First into the fray is non-eurozone Britain, with Chancellor of the Exchequer Gordon Brown insisting that the German case has shown that the pact “needs to take into account the economic cycle, investment needs and have greater understanding of the sustainability of debt.”
France, meanwhile, is insisting that now more than ever, eurozone governments have to start thinking about setting up an ‘economic government’ for Europe. The stability pact cannot be applied in a mechanical, narrow fashion, says Paris. Strict monetary rules are fine - but they have to be used with political finesse and tact.
The excitement over the nearly early warning for Germany will probably die down in the coming weeks. But the serious questions raised about the credibility of the eurozone’s rules and rule-makers will linger for months to come.