The European Union is not looking particularly united at the moment. In a single week, the two major euro zone players have torn up already broken rules that are supposed to underpin the value of one of the world’s three leading currencies and a cabal of three EU states has launched a foreign policy initiative toward Russia, which may very well undermine a tougher Brussels stance planned for a formal EU-Russia summit in seven weeks’ time.
The Growth and Stability Pact which was designed to protect the single European currency, the euro, was flouted almost immediately as France rigged its budget deficit to qualify, Belgium was allowed to join despite a massive public debt because the ration to GNP was coming down and the Germans tried to fix their figures by revaluing their gold holdings. Since the creation of the euro in 1999, France and Germany along with Spain and Italy have regularly failed to meet their obligations under the pact and have thus notionally been liable to stringent financial penalties. True, they have simply received regular scolding from the European Central Bank (ECB) but not much else.
This week the shambles came to a head when it was agreed that the rules could be relaxed so that those of the 12 euro zone states that needed to, could run larger budget deficits. The ECB whose view is formed almost entirely by bare statistics has said that it is very unhappy. However, as with so much else about the euro, political considerations have once again won the day. Leaders who treasure the single currency as a major stride toward a politically unified Europe could not afford to have the Growth and Stability Pact flouted any longer. They have therefore relaxed its conditions so that no one will fall foul of it. This could be a pivotal moment for the euro. Now that it is clear that if enough important euro zone countries can rewrite the rules whenever they are in danger of breaking them, the principle of budgetary and financial discipline flies out the window. The only “temporary” thing about this easing of the rules is that they will change when a new failure demands further “temporary” measures.
This might not matter were the euro not, with the dollar and the yen, a major world currency. Market analysts believe that the euro’s strength is a reflection of the relative weakness of the other two currencies rather evidence of its own underlying strengths. Yesterday currency traders started selling euros. In the short term, a weaker European currency might help its exporters lead economic recovery, but over time, if the euro continues to be underpinned by gimcrack budgetary policies and fixes, it will suffer.
In trouble too may be any consensus on EU policy toward Russia thanks to the Paris meeting between President Putin and French, German and Spanish leaders. It appears that the Russian leader was given an easy ride over the increasingly dictatorial nature of his regime, the gunning down of the moderate Aslan Maskhadov and the continuing horrors in Chechnya. If so, this will have swept the rug from beneath the official EU team when they meet the Russians in Moscow for their May 10 summit.
