3 April 2004

Government Spending to derail EU Stability Pact

The de-facto demise of the Growth and Stability Pact has been hailed as long overdue by quite a few well-known economists - let alone the usual suspects in the finance ministries and governments that abhor any form of democratic control of their spendthrift ways.The pact was devised in order to avoid that countries that get into fiscal difficulties have to be bailed out by the other members of the Monetary Union. That fiscal transfers would be necessary in times of difficulty seemed to be accepted as self-evident. We beg to differ.In the days of the Gold Standard there was no transfer mechanism and each country had to follow the rules without 'multilateral' support. Why this should not be possible in the Monetary Union is not clear to us. In the worst case a country would default, but that has happened before. Why should that be a problem?What is a problem is the fact that by abrogating the Stability Pact the political class in Europe has shown that the citizens can have no confidence in their 'leaders'.Governments refuse to reform and reign in their vote-buying habits. They are on a collision course with reality as the slice of GNP that is directly or indirectly (regulation) eaten up by the Public Sector cannot go on rising forever.