EUROPACTS

It is important to realise what the latest Europact may do, and what it certainly won't do.

25 of the 27 E.U. countries (the U.K. and the Czech Republic being the naysayers) have agreed to enshrine in their respective national laws an agreement limiting public sector budget deficits. In fact, existing E.U. legislation already had this; there were limits on deficits (3% of GDP) and debt (60% of GDP). However, when France and Germany, two of the biggest countries, broke these limits during the noughties, they got away with it, not least because they were big. Putting the agreement into national legislation, rather than leaving it at the E.U. level, makes it more likely that Governments will adhere to it next time round.

But making a crisis less likely in the future will do absolutely nothing to sort out the existing one. Indeed, since almost all countries are currently outside the proposed limits, getting from A to B will necessarily involve Governmental belt-tightening. Reduced Government (net) spending automatically reduces overall economic demand (unless the private sector and/or net exports make up the shortfall, and they don't seem to be doing that); so fiscal stringency today may well make the situation worse rather than better.

I think Angela Merkel, architect of the pact and general schoolmistress of the E.U., well knows this. However, she was both determined to put the longer-term measures in place (in order to placate domestic German voters fed up with feckless southerners) and aware that the E.U. only embraces radical change when there is a crisis. The risk, of course, was that the whole Euro zone would implode before the longer-term measures were in place. She has managed to avoid that - just. And once the national Parliaments have duly done her bidding, I fully expect her to reduce her hostility to greater intervention by the European Central Bank and/or some kind of Euro-area bonds, the two things needed to sort out the current mess.

In other words, and despite criticism from many quarters, I think she has played her hand with impressive skill.   

Walter Blotscher