Quotes of the Day

Maybe if economics were a pure science, its dictates would be immutable. But when mixed up in the messy art of politics, it has a vexing tendency to go sloppy. Last week brought a telling example of how one unprecedented experiment in budgetary governance — the euro zone's Stability and Growth Pact — went awry, leaving governments and economists bickering over their numbers and Brussels, as usual, in the doghouse.

Like many imperfect ideas, the Stability Pact seemed golden when it was created. In 1997 the only cloud on the horizon of monetary union was inflation. There had to be some agreement among countries using the euro that none of them would spend wildly, thus pushing up interest rates and queering the game for everybody. No one was more fixated on inflation than the Germans, haunted still by hyperinflation between the World Wars. Their Finance Minister, Theo Waigel, pushed for an explicit agreement that obliged the euro-zone countries to keep their deficits under 3% of gross domestic product. "The idea was to protect the countries with a record of stability from those that previously had run large deficits," says Waigel, a Bavarian conservative who announced his retirement from the Bundestag last week. "But now the Stability Pact is protecting the small countries from the big countries like Germany, France and Italy."

Or not. For it was from the small countries that outrage rose last week after Pedro Solbes, the European Commissioner for economic and monetary affairs, advanced a new interpretation of the Pact that seemed to leave wiggle room for the big boys: Germany, France and Italy. As recently as last June, E.U. finance ministers agreed that the Stability Pact's dictum to balance budgets in the "medium term" meant by 2004. Now Solbes was saying 2006. He did so because torpid growth and a timid approach to reform in the three largest euro-zone economies meant that none of them could meet the original goal.

But he got no applause in those countries that had. A spokesman characterized the reaction of Finnish Finance Minister Sauli Niinisto as "unprintable," and the comments of his colleagues from other countries that have crimped and clawed to get their budgets in line also had a seething undertone. Austrian Karl-Heinz Grasser bemoaned "a 'two-class' system with large euro states that don't have budget discipline and small states that [do]." The Belgians, Dutch and Spaniards were equally shocked — shocked. In the same week that a fudge was in the works for the giants, a formal sanctioning procedure was launched against tiny Portugal, for flouting the Stability Pact by registering a 4.1% deficit last year.

The tone in Paris, Berlin and Rome was hardly apologetic. For Italian Economy Minister Giulio Tremonti, the missive from Brussels was manna from heaven. "While the maximum aggression was coming down on me in Italy, in Europe we received the maximum collaboration," he crowed.

In Germany, the current sick man of the European economy, the government welcomed the new breathing room while insisting that the Stability Pact was still a good thing. Thomas Gerhardt, an aide to Finance Minister Hans Eichel, said that Germany might have reached the original goal of balance by 2004 if the bottom hadn't fallen out of the economy. But with tax revenues in a downward spiral and the task of modernizing eastern Germany still incomplete, he said, "the stability goal becomes something of a moving target." A more realistic interpretation strengthens rather than weakens the Pact, "because it doesn't make sense to stick to a timeframe if economic growth doesn't develop as initially thought."

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.

• JAMES GRAFF / Paris
• Europe's big economies can't keep their deficits down, so Brussels is changing the rules