Helsinki (28.04.2003 - Peter J. Boldt) "Stupid," was the comment of European Commission President Romano Prodi a while ago on the EMU Stability and Growth Pact. This arrangement does not allow the public sector deficit to exceed three per cent of GNP. As the highest guardian of the European Union founding treaties, Prodi should not have been allowed to make such a statement, but he chose to publish his point of view in his civilian capacity as a professor of economics.
When SAK economists have criticised the Stability Pact over the years, most Finnish economists have regarded us as irresponsible and ignorant.
Nowadays, however, it is widely admitted, even at the European Commission, that the Stability Pact is not working. The strict deficit restriction prevents active finance policy precisely when it is most urgently needed, i.e. when growth slows down and unemployment grows.
At the same time the European Central Bank – ECB sticks to a tight monetary policy and, despite a slowdown in economic growth, interest rates have not been cut in a year. In the USA, by contrast, the Federal Reserve Bank has radically supported growth and employment by cutting interest rates.
Although co-ordination of finance policy - or budgetary policy - within the EMU is needed as such, there are grounds for checking the arguments and mechanisms employed. Surplus creation during a high economic cycle tends to be more important than deficit restrictions during a low economic cycle. Back when Germany proposed the Stability Pact, the main argument was a strong euro. It was feared that public sector deficits would undermine the euro, especially in relation to the US dollar.
Although the euro was initially more valuable than the US dollar on its introduction in 1999, it then immediately began a steady fall. A couple of years ago complaints were voiced in the media about the low value of the euro against the dollar, and at the low point in Summer 2001 it was worth only USD 0.85. Currently, however, the euro stands at about 1.06 US dollars. Despite this, hardly anything has been written in the press about how well euro is doing now.
For economists it has been quite amusing to watch the euro strengthen as the deficit of the larger euro countries has grown. This precisely defies the logic of the Stability Pact!
The EU Convention has discussed EMU and the Stability Pact. While the working group for economic policy proposed no changes, the working group for Social Europe has discussed co-ordination of finance policy and social policy – which in practice refers to employment policy.
The voice of organised civil society in the EU is the European Economic and Social Committee – ESC, which includes representatives of the social partners and several other participants in civil society from all of the EU Member States.
In December the ESC approved a statement on economic governance of the Member States. This emphasised that the Stability Pact should not obstruct active finance and employment policy. The statement largely followed the line of the European Trade Union Confederation. The public sector deficit should not be treated mechanically, but in relation to the economic cycle – as the Commission now admits. When judging the deficit one should also pay attention to public investment and to inputs in research and development.
Hopefully the EU Convention, and then the intergovernmental conference to reform the European Union’s founding treaties, will find the courage to modify EMU and approve clear growth and employment goals for the European Central Bank.
*Published originally in February 2003 in the SAK magazine Palkkatyöläinen. Peter J. Boldt is an economist at the Central Organisation of Finnish Trade Unions – SAK.