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When the euro project breaks

The European Commission demands that German state spending be cut by NOK 50 billion next year – and that the German government explains how it will happen by 9 January. Similar requirements are imposed on France. Both countries are reporting civil disobedience.




(THIS ARTICLE IS MACHINE TRANSLATED by Google from Norwegian)

The background is that for the third year in a row, both countries are likely to have a deficit in the state budget greater than three per cent of the national product. This year, both Germany and France are likely to have a deficit of 4,2 per cent. The regulations for the EU's monetary union prohibit such large deficits. It is stated in the so-called "stability pact" that Germany set as a condition for launching the EU's monetary union in 1999.

There were countries that Italy, Spain and Greece were to be disciplined. The Germans would not risk replacing stable D-marks with an unstable euro without credibility in international markets. For the time being, the euro is holding strong, but it may be because the dollar is falling so strongly. The budget deficits are also approaching the dangerous three percent limit in four other EU countries, the United Kingdom, Italy, the Netherlands and Portugal.

Commission in cat pain

The European Commission has been in cat pain in this case. It has previously reacted strongly to far less dramatic breaches of the Stability Pact from Portugal and Ireland – and many countries require that large countries such as Germany and France be treated as severely as smaller countries.

On the other hand, the governments of Germany and France have made it clear that the orders from the European Commission will not be followed up. Both countries are struggling with stagnant economic growth and rising unemployment. This means that tax revenue is failing and that the cost of unemployment benefits is only increasing. In such a situation, cuts in public expenditure mean that the problems worsen – that growth opportunities are affected and that unemployment increases further.

Provokes small EU countries

The conflict with Germany and France has thrown the EU into chaotic terrain. In advance, governments in many smaller EU countries have been provoked by the draft constitution that is scheduled to be adopted at a four-week EU summit.

This proposal involves a significant shift in power from small to large EU countries. Then it becomes an additional challenge that Germany and France do not follow the rules that they themselves enforced before the currency union came into place.

Criticism from the Netherlands

The Minister of Finance in the Netherlands, Gerrit Zalm, therefore speaks on behalf of several colleagues when he goes out with strong criticism of Germany and France. They cannot sweep aside rules that small countries must follow, if they want to pass a constitution that gives them more power over such regulations as well. It is a "completely wrong signal" to send – says the Dutch Minister of Finance.

In the Netherlands, a referendum is being held on the new constitution. Zalm is afraid that it will now be more difficult to convince voters of the entire "Europe project" – and receives support from Austria and Finland.

Wrong signal to new EU countries

But it will be a particularly wrong signal to send the ten new member states – claims the Dutch Minister of Finance. In order to be accepted as members of the EU, they have for years struggled to fulfill every little hint from the EU. Then they experience that Germany and France, two of the most demanding EU states, stretch the regulations as best suits them – and warn of civil disobedience if the EU majority should take the regulations so seriously that it interferes with German and French budget policy.

Tough meeting between the ministers

Therefore, it can be a tough meeting on 24 November when the EU finance ministers meet and will take a stand on the proposal from the European Commission. For it is not the Commission that has the final say. The ministers have this when they meet in the EU Council of Ministers.

In this Council, Germany and France have ten votes each. They cannot vote in their own case, but Italy – even with ten votes – has already shown great understanding of the German and French problems. The Italians themselves have struggled to stay below the three percent limit for a few years.

No more than 26 votes are needed to block decisions in the Council of Ministers. It is therefore not certain that the meeting between the finance ministers on 24 November will end up demanding cuts in the German and French budget deficits.

German-French pairing

This can provoke the majority violently. First, because Portugal and Ireland did not escape as easily when they were in a similar situation for two years. But also because Germany and France have recently run a race that challenges other EU countries.

  • n Together with Belgium and Luxembourg, the pair of horses agreed to establish a military headquarters independent of NATO – even if other EU countries did not participate.
  • n Together with the United Kingdom, they negotiated an agreement with Iran on the Iranian nuclear program – without any contact with the EU's governing body.
  • Most importantly, it provokes a kind of private mini-union between the political leadership in Berlin and Paris ahead of important EU meetings.

The big ones overlook the little ones

It does not soften the mood when other major EU countries are the only ones included in new German-French initiatives. Germany, France, the United Kingdom, Italy and Spain recently launched a joint fight against illegal immigration. These five states have 48 of the 87 votes in the EU Council of Ministers, and could obviously have obtained a large enough majority for their vote there. But it is probably faster when five talk together than when fifteen do.

If the draft constitution is adopted at the EU summit in December, the same five states will have 66 per cent of the votes in a Council of Ministers with 25 member states – while in the current EU with 15 member states they have 55 per cent of the votes. This sharp shift in voting power from small to large countries becomes extra unattractive for the small ones when the big ones do not even bother to meet with the small ones – and when they do not think they need to follow rules that the small ones are expected to follow.

CURRENCY UNION AS A FORCE SHIRT

When economic growth slows and unemployment rises, there is a need for what economists call a more "expansive fiscal policy": either taxes should be reduced without cuts in government spending – or government spending should be increased without taxes being increased.

This is the main demand of the German and French trade union movement today. It is more important to stop the growth in unemployment than to keep the budget deficit lower than three percent. In addition, the EU's central bank must be required to pursue "an expansionary monetary policy", ie lower interest rates.

The latter is in direct conflict with the job required by the central bank through the EU Treaty. It states that the central bank has only one task: to keep prices stable. This means that if central government budgets are expansive and drive prices up, the central bank must do the exact opposite: set interest rates so high that prices do not rise by more than two per cent a year. As a result, there will be no "expansive monetary policy".

Sentenced to guard one another

The EU's 15 finance ministers are doomed to guard each other: A government that runs more expansively than the others gets in the bag: low inflation "as a gift" from the central bank and from those who tighten a lot, increased growth and employment by tightening a little itself – and yet the same interest rate as everyone else.

Other countries will not find such a thing. A system has been created in which the EU's 15 finance ministers have to look out for each other. In the EU's currency union, governments must hold each other in a mutual coercion jersey.

Required from Brussels

Every year, for example, EU finance ministers adopt so-called "economic policy guidelines". They have e.g. that all state budgets must be in balance by 2004 at the latest.

The European Commission is now endorsing this decision. Germany and France do not have to balance their budgets until 2005.

The euro was launched as a guarantee of economic stability and safer growth. Facing global downturns with austerity is never a shortcut to the downturn. That the austerity is announced from Brussels does not make it more popular.

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