The single European currency has been in service for the last six weeks. But already there has been a violent struggle over the controls. The guardian of the euro is the European Central Bank, which is charged with protecting the value of the currency through the adjustment of interest rates. But in the Stability and Growth Pact, the architects of the single currency enshrined the fundamental rules with which it should be run. This commitment, into which all the 12 eurozone countries entered, was supposed to have been monitored and maintained by the European Commission in Brussels.
Effectively, the euro was sold on the basis that once member states had joined up, they would be locked into a series of financial controls that would stop them running up budget deficits and going on public spending sprees which would boost the ratio of their public debt to their gross national product. The responsibility for enforcing these controls lay with the bureaucrats, not with European politicians.
It was on this basis that two weeks ago the Commission issued formal warnings to both Germany, the original prime mover for the tough Stability and Growth Pact rules, and Portugal that they were in danger of breaching the limits.
However, in Brussels this week, the Eurocrats came up against the EU’s finance ministers, and in what appears to have been a series of ill-tempered meetings, the officials were forced to back off from their strict enforcement of the rules. In the eyes of many commentators, this effectively means that Stability and Growth Pact is a dead letter. It is not difficult to see why the politicians decided to strike down the Brussels bureaucrats. Almost without exception, EU economies are suffering the effects of recession. Falling economic activity means less taxation for governments to spend. If they want to find cash, for "economic pump priming", to speed recovery and renewed growth, they will have to borrow. If like Belgium, you are already over your debt-to-GNP ratio and were only admitted to the eurozone because the ratio was falling, it means that the Stability and Growth Pact rules will be broken absolutely.
It is astonishing that at the very first real test of the new currency, only six weeks after it became fully functional, EU finance ministers should decide to tear up the rules. What the international money markets will think about this radical change will soon become apparent. Their reaction is unlikely to be forgiving.
But more important than that, what about the citizens of the eurozone, especially those who were given an opportunity to vote on joining the new currency? They were told at the time that the euro was going to be a stable alternative to their own currencies, precisely because its management was divorced from political interference. The rules to protect its value were strict and could not be changed. Those who voted in favor of the euro, therefore, voted for something that has turned out, with remarkable speed, to be a lie. Moreover, market makers who were vilified by Brussels for immediately marking down the euro against the dollar, would seem to have been following the right hunch after all. The single currency could be heading for serious trouble.
