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| Illustration for TIME by STEVE BRODNER
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| Loosening The Ties That Bind |
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Europe's big economies can't keep their deficits down, so Brussels is changing the rules
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By JAMES GRAFF/PARIS
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Posted Sunday, Sept. 29, 2002; 2.15 p.m. BST
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.
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