The curse of Europe - Germany takes a beating

[Sven R Larson <larson@xxxxxx>]

I presume my European and British colleagues have noticed the recent
debate about the face off between the EU Commission and Germany. It
seems to have ended with the Germans caving in. Here's a brief sum-up of
an article in today's Politiken, a Danish newspaper:

---
Theo Waigel [fmr German finance minister] invented the stability pact
which yesterday punched a hole in Germany's national pride. His
successor, Hans Eichel, now has to suffer the humiliation of recieving a
strongly worded censure from the Italian chairman of the EU commission,
and the Commissioner of Finance, the Spanyard Pedro Solbes, because the
Germans are not good enough at keeping their economy in shape. This is
not how Theo Waigel had imagined that the [economic stability] pact
would come to work. Quite the contrary, he had imagined that the
responsible and disciplined Germans would have an effective tool in
keeping the others within close ranks - suich as the Italians, Spanyards
and other Mediterranean countries which traditionally have had too large
defiucits, higih inflation and as a result unstable currencies. /.../
Waigel's goal was to have introduced such a stiff and rigid fiscal
disciplin tat neither sheer sympathy, back-scratching or political
blackmail would save a government going the wrong way. /.../ The warning
that Germany is on a fiscally unhealthy route has no other immediate
result than political humiliation. Only when the deficit exceeds 3% of
GDP, and if the government does not do anything about it, mandatory
deposits and fines will kick in.
---

This tells us two things.

1. Since both France and Britain have expressed sympathy for Germany, we
can safely conclude that both countries are bound for deficits
themselves, AND that neither of them wishes to correct their deficits
with spending cuts and tax hikes. Since the Germans now cave in the case
for sustained routes towards deficits in other EU countries is much
weaker. In fact, it is likely that this will lead to union-wide spending
cuts this year and next. The results in terms of employment and
macroeconomic health in general are well known.

2. People here in Europe and also in Britain will now have a very
tangible experience of the Maastricht Treaty in their every day lives.
But this is not all: as a result of its having to send reprimands to
member states (Portugal is allegedly also bound for the 3% limit) the EU
Commission will step up efforts for setting up its own formal tax
agency. "If you guys can't run the show we'll simply have to take over."
I suspect they will have their own locally operating tax collectors
within five to six years.

/srl


--
Sven R Larson
Ph.D.; Assistant professor of economics
Department of Social Sciences, 22.2
Roskilde University
PB 260
DK-4000 Roskilde, Denmark
http://www.ruc.dk/english/