The United States is not the only country wrestling with its deficit demons these days. In a story that has been building for some time (and not receiving its due attention on this side of the pond)

Gerhard Schröder, the German chancellor has called for loosening of the European Union’s fiscal rules, an alteration that would allow Germany and other countries to run significant budget deficits.

That passage appears in an article from today’s print version of the Financial Times (“Schröder calls for loosening of fiscal rules”). Here is Schröder’s call, in his own words, as appears in an FT editorial:

Reform of the European stability and growth pact is a key issue in European economic and financial affairs…

Reform of the “excessive deficit procedure" will be the cornerstone. Strategies for reform must reflect the fact that it is not just a stability pact, but also a growth pact. Whether a fiscal policy is “right” and promotes stability and growth equally cannot be measured solely by compliance with the deficit reference value of 3 percent of gross domestic product. We must recognise that the goal of consolidating public budgets may well conflict in the short term with the goal of enhancing the potential for economic growth.

Hmmm. Here’s what he suggests.

This is the starting point for the reform concept developed by Hans Eichel, Germany’s finance minister, and strongly supported by me – a concept that enhances the growth component of the pact. Under our proposal, the European Commission and council of ministers would use mandatory criteria to review whether an excessive deficit procedure should be instigated against an EU member with a deficit that exceeded the reference value. The most significant criteria would be pursuit of a sound policy for growth and employment, for which the country must be given leeway.

The criteria can be divided into three groups. First reforms – such as measures under Germany’s “Agenda 2010” to safeguard our social security system, to improve the labour market or our tax reforms – can in the short run damp growth or increase deficits. But in the medium term their impact… is clearly positive. These facts must be considered when assessing the deficit.

Macroeconomic criteria from a second group. Member states must be given sufficient leeway to provide cyclical incentives…

Finally, specific burdens borne by member states should be taken into consideration.

That last item would include the costs of German reunification. Not surprisingly, Schröder’s proposal doesn’t thrill everyone. From yet another FT article on the subject, written by George Parker (“Leaders strain at the stability pact leash”):

Gerhard Schröder’s call… brings to life the “horror scenario” that Gerrit Zalm, the Dutch finance minister, most fears.

If there is one thing EU finance ministers agree on, it is the heads of government should not take away their lead in revamping the discredited five-year-old stability and growth pact.

Members of this parsimonious club do not want prime ministers to cede control to prime ministers, whom they believe to be… less conscious of the need for budgetary discipline in a currency union.

But the article goes on to raise an interesting question regarding the pact’s original rationale.

…the budget limits… [were] put together in the 1990s principally by finance ministers and central bankers.

The argument then was that a centralised monetary union could not function with a decentralised fiscal policy: hence the euro project is both an economic and monetary union.

If so, Parker continues, is that rationale not somewhat faded?

If the stability pacts rules are highly inconvenient for national politicians, many leaders have noted that the markets seem largely oblivious to the collapse in its credibility.

Indeed, the euro has been soaring even as the pact has been reduced to rubble by repeated French and German breaches of its deficit ceiling…

Comparisons to the U.S. seem apt. Does it seem to anyone that the Fed’s credibility for maintaining price stability has been substantially weakened by the reversal of the federal surpluses of the latter 1990s? Perhaps one could argue that the arms-length distance from the Treasury that characterizes US monetary policy is not so obvious for the European Central Bank. But, in fact, the two institutions appear to more similar in that regard than different.

And to Schröder’s arguments about judging whether deficits are good or bad. Let’s leave aside the cynicism for the moment, and think about the economics of his argument. Is it possible that Schröder has a point? And couldn’t the very same arguments be made by the current administration in the U.S.?

OK. Have at it.