What stability pact for Europe?

The current economic situation in Europe is worrying. GDP growth for next year has been revised downwards and unemployment has been growing in some countries. The average growth rate estimated for this year is 0.8% and 1.8% in 2003. Moreover, four countries (Germany, France, Italy, Portugal) are facing difficulties keeping their budget deficits below the three percent ceiling and some have even surpassed it (Germany and Portugal). According to forecasts, Germany is likely to have 3.4% deficit next year, Portugal 2.4%, whilst France and Italy are likely to see a rise in their deficits (2.9% for France next year while Italy would reach this value in 2004). However, the current economic downturn should not become the excuse for the elimination or the softening of the stability and growth pact. The pact has some inefficiencies which led to some inconsistency in economic policy management in the Euroland but that should not imply that the stability and growth pact serves no purpose. Indeed, it is essential to have a rule for the co-ordination and mutual surveillance of budgetary policies in the EMU. Moreover, various studies point to the excessive burden that will be imposed on public spending from 2015 onwards, due to population ageing, which makes this one of the most important issues for the future. These studies point to an increase of between 4%-8% in public spend just to finance pensions due to population ageing. According to a recent UN study, developed countries are likely to lose 15 million inhabitants, a situation which will naturally imply a stronger effort by the State to cope with this pressure. Therefore, it is essential that countries pursue sound fiscal and budgetary policies in the years to come which imply expansionary policies during economic downturns and restrictive polices during an economic boom period. Hence, balanced budgets in the medium term are essential. If not, countries will be faced with no other option but tax rises to cope with the extra expenditure that will be needed. Moreover, one of the purposes of the stability and growth pact was to avoid any policy conflict between monetary and fiscal policies. It aimed at preventing countries from running higher than desirable budget deficits which they might be tempted to do in a monetary union as the effects resulting from such a deficit would spread around the entire MU thereby diluting its negative effects in the domestic country. Furthermore, it was meant to ensure some economic policy co-ordination and together with the broad economic policy guidelines provides the only economic policy co-ordination in the EMU.