Loosening The Ties That Bind

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France rejoiced at Solbes' olive branch on Tuesday and trampled it the following day by putting forward a budget that won't even attain balance in 2006 unless it gets three years of 3% growth. That's not likely in light of Finance Minister Francis Mer's unguarded comment that "the reality is certainly not going to be 2.5% growth." The budget made it brutally clear that in France the E.U.'s strictures ranged far below more pressing domestic concerns. President Jacques Chirac has promised tax cuts of 30% by 2007, and government spending isn't shrinking. Solbes complained that "the French government is postponing its fiscal consolidation process."

"The Stability and Growth Pact is now a busted flush," says Kevin Gaynor, an economist with UBS Warburg in London. Paul de Grauwe, an economics professor whom Belgium unsuccessfully pushed to join the E.C.B. board last April, has long contended that a rigid system of target numbers was a poor way to guide budgetary policy. "Why should people believe that 3% is some magic number?" he asks. "No other country has such a rule. It's a defensive mechanism meant to guard us forever against inflation. But it's dangerous when the big risk is deflation, as it is today." Perhaps this debacle will inspire a rethinking of how to coordinate budgetary policy without robbing politicians of a tool they apparently forgot they'd need back: basic deficit spending. Such a reform has been high on the wish list of Gordon Brown, Britain's Chancellor of the Exchequer. A more supple formula would no doubt sweeten the prospect of early British membership in the euro zone.

But no one is betting on big changes soon. With U.S. public finances in no better shape than Europe's, the euro has weathered this latest example of budgetary slippage rather well, remaining at a healthy rate of $.98. That keeps the pressure for wholesale reform off for now. But it doesn't mean there won't be a row next week, when Europe's finance ministers meet in Luxembourg.

Waigel, the Stability Pact's godfather, remains proud of his creation. "If the Stability Pact didn't exist, nobody would be interested in knowing whether Portugal had a deficit of 4.1% or Germany of 3.2%," he says. "Only because of it has a culture of stability emerged in Europe, so that the public scrutinizes a country's statistics. And that has a positive effect." But he says that from the sidelines, not the trenches.