Newspaper article The Evening Standard (London, England)

After the Deal over Germany Are We Deep in Eurozone Fudge?

Newspaper article The Evening Standard (London, England)

After the Deal over Germany Are We Deep in Eurozone Fudge?

Article excerpt


THE Euro-group of the EU finance ministers - the 12 from the euro-area - is increasingly where EU financial matters are settled.

By the time Chancellor Gordon Brown was ushered into the full EU-15 meeting on Tuesday, a compromise had already been hammered out on the embarrassing matter of Germany's budget deficit. This is projected to be 2.7% of the country's gross domestic product this year, perilously close to the 3% limit set in the Stability and Growth pact on which Germany itself insisted as a condition of monetary union.

Was it a euro-fudge? A year ago, Ireland suffered a public reprimand from both the Commission and the Council for cutting taxes when its economy was booming. This year, the Council funked approving the Commission's early warning, even though Germany is skirting the line. For small countries - Austria was voluble - this shows that there is one rule for the small, and another for the big.

Especially when the big ones face elections, as Germany does on 22 September.

The Commission says that it is happy with the outcome because it never sought a change in German policy (whereas it had objected to Irish tax cuts).

The idea was to warn Germany to meet its existing plans, rather than to raise taxes or cut spending.

The Commission can also point to new pledges from Hans Eichel, the German Finance Minister, to use any unexpected revenue to cut the deficit. Germany agrees that once the recovery is under way it may need to rein back spending or raise taxes.

The financial markets judged this to be credible: bond yields and the exchange rate hardly changed. That is probably the right judgment.

After such a pre-electoral wigging, the German government is unlikely to take any risks with fiscal policy. Measured by the likely outcome, the Commission's "early warning" should be effective.

If there is a fault in the system, it is that Germany was not warned two years ago, when it began to cut taxes despite its boom. Like other euro-area countries, it entered the system with a sustainable budget position, and could have happily weathered a normal recession. …

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