Sunday, July 18, 2004

Is the euro at risk? Maybe the EU itself?

The credibility of the euro — the currency of only 12 of the 25 EU member states — rests upon both the economic performance of those countries as well as their adherence to the key rules embodied in the Stability and Growth Pact that governs their financial behavior.

...France and Germany have continued to break the deficits rules while other members like Italy appear to letting their borrowing grow fast. The European Court was therefore entirely correct when it decided that EU finance ministers had no right to let France and German escape censure and penalties from the European Commission for breaking rules. Yet it seems most unlikely that the already suffering French and German economies will have to pay big fines. Instead a move is gathering pace to change the rules that underpin the euro.

This is a risky strategy for two reasons. First it will allow countries that are already a mile off their obligations to move a further mile away. This could turn the Euro zone into a financially weak and chaotic economic entity. The debilitating economic ills of one or two countries could bring down the others. However perhaps the more important reason that a rewrite of the much vaunted Stability and Growth Pact is so risky it the message it will give to the rest of the world, not least the new EU members. The EU has just produced its first constitution, designed to protect and balance all interests. Inevitably this document will need amendments, but if those changes arise from political failure and indiscipline, as is happening with the euro, the whole international standing and future of the EU may rightly be questioned.
Al-Jazeerah article

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