13 November 2003

EZA Report 568: Euro-Economy

Unworkable Stability Pact to survive despite French vote
The European Union's Stability and Growth Pact (SGP) is unlikely to be dismantled any time soon, even if the Ecofin vote on Nov. 25 on whether to initiate excessive deficit procedures against France places a severe questionmark over its viability. The lack of a serious academic debate about the design of the SGP has left the pact devoid of strong supporters amid the first severe economic slowdown since European Monetary Union began in 1999. Indeed the 3%/GDP reference value for public sector deficits is arbitrary and not grounded in economic logic. However the SGP, or a flexible interpretation of it, is highly likely to survive, both because of the difficulty of agreeing an alternative EU rule or co-ordination mechanism for national government budgets and because of concerns about the reaction in financial markets and EU accession countries should it be dropped. That said, the SGP does not have the status of a Treaty obligation. Incentives to co-operate are often at odds with local political incentives. Thus, further transgressions of the pact can be expected by member states and are likely to be resolved by only fudging and intra-area deal-making.

SummaryAsset Conclusions: More flexible SGP interpretation is slight negative for euro, its debt markets as deficits hold above 3%/GDP, uncertainty remains

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© Graham Bishop