The handcuffs that once limited European governments' budgetary powers look set to come off, raising big questions about the future growth and stability of the euro-zone economy.

That from an article by G. Thomas Sims in "The Outlook" column of yesterday's Wall Street Journal (page A2). Here's the second paragraph:

During the weekend... European Union finance ministers drew closer to endorsing a recent proposal that would give countries more room to run budget deficits. The push for change comes as six of the 12 countries of the euro zone -- representing about 80% of its economy -- are on course to break the current rules that limit deficits to 3% of gross domestic product.

Not everyone is happy about this. Bloomberg reports:

European Central Bank President Jean-Claude Trichet... said central bankers oppose rewriting a regulation that forces governments to keep deficits below 3 percent of gross domestic product and sets a one-year deadline for fixing budgets that swell over the limit...

Finance ministers from Spain, Austria and the Netherlands allied with the central banks in denouncing any proposals that would give big countries such as France and Germany more maneuvering room to run deficits.

``We have always had the same position in this respect, open to improvement of implementation, very cautious,'' said Trichet, who began an eight-year term last November as head of the Frankfurt-based ECB. Referring to the 3 percent deficit limit, he said: ``As regards to the corrective arm of the pact, it is very important not to change the nominal anchor.''

This reaction is explained in the WSJ article:

... the European Central bank fears higher debt will lead to higher inflation and lost credibility. "If the rules were to be loosened," said Nout Wellink, a member of the ECB's governing council," "it would make policy more unbalanced, and at the end of the day that would result in higher interest rates."

Brain exerciser: What do you think about the effect of deficits on inflation and interest rates? Do you side with the majority opinion of the finance ministers, or with the central bankers?