Europe's Balancing Act

Amid an otherwise gloomy economic environment, European observers brightened this summer as the euro rose 10% against the dollar. But some now fear the euro's hard-won credibility as a dollar substitute may soon be sabotaged by European governments themselves, as some try to water down a founding euro zone covenant: the obligation, set out in the 1997 Stability and Growth Pact, to continue to lower deficits until national budgets are balanced or in the black.

Last month governments in Germany, France and Italy acknowledged that their dramatically slowed economies had produced lower tax revenues than their budgets, constructed last...

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