From an editorial in today's Financial Times:
European finance ministers finally agreed to relax the enforcement procedures of the pact, which underpins fiscal policy in the European Union. In fact, they weakened it so fundamentally as to render it practically worthless. The original idea behind the pact was to ensure long-term sustainability of public finances in the eurozone. The old pact has failed to achieve this. The new one does not even try.
Officially, the strict nominal anchors of the pact remain in place, including the maximum 3 per cent deficit-to-gross domestic product ratio, and the 60 per cent debt-to-GDP ratio. But in reality, the agreement effectively raises the maximum allowed deficit-to-GDP ratio to at least 3.5 per cent - possibly close to 4 per cent - depending on how finance ministers define a number that is still "close to the reference value". "Due consideration" will be given to three ill-defined spending categories: international aid; European policy goals; and European unity.
The Lex column (susbscription required) was even more brutal:
The paper tiger known as the European Union's stability and growth pact has officially lost its teeth. At least the beast still has an Orwellian touch. The fiscal rules underpinning Europe's common currency originally seemed to suggest even saints should be judged guilty until proven innocent...
Now, Europe's leaders once again seem to agree with George Orwell, that human beings want to be good, but not too good and not all of the time...
All this may do little harm, assuming the European Central Bank resists the temptation to punish Europe's politicians by raising rates. The rewrite looks set to turn a nonsensical, rigid and discredited set of rules into one that is merely obtuse. But one probably has to be an EU finance minister to see this as progress.
As noted here earlier, that ECB thing may be a problem.
The ECB said on Monday that it was “seriously concerned” about changes to the fiscal rules proposed by finance ministers on Sunday night, claiming that they could weaken budgetary discipline in Europe.
In a statement the ECB hinted that interest rates might have to rise as a consequence.
Others failed to be impressed as well.
The deal was also attacked by German industry. Anton Börner, president of the German exporters' association, said: “Our children and grandchildren will have to pay the price for the failure of politicians to look after the money they are trusted with.” The BDI industry association warned that the pact would soon become “toothless”.
In this International Herald Tribune essay, Bank of America's Holger Schmieding takes an anticipatory shot...
... EU leaders are likely to acknowledge officially that they have neither the will to live under the self-imposed strictures of the Stability Pact nor the guts to finally do what it takes to turn a semistagnant Europe into a genuinely dynamic economy, as they had envisaged in their so-called Lisbon Agenda five years ago. In both cases, the EU's sclerotic big bullies look set to prevail over the more prudent and reformist minnows.
... and argues the need to get on to more durable reforms.
Unfortunately, the current debate suffers from one central flaw: The Stability Pact and the Lisbon reform strategy are treated as if they were completely separate.
... realism might suggest that turning the old EU into the world's most dynamic knowledge-based economy by 2010, the goal set at an EU summit meeting in Lisbon in 2000, is a mere pipe dream. So why not just say so and let each member country get on with its own action plans - or lack of action - as it sees fit?
... The focus needs to be on reforms for growth, not on failed rules or stale Lisbon exuberance. Within the EU, as in any club of sovereign but unequal members, the big ones get their way more often than not. However, the minnows are not powerless. In the EU, all major decisions need to be consensual, even if it is a grudging consensus.In return for their acquiescence in the death of the Stability Pact, the more prudent and reformed EU members should demand that the fiscal sinners allow further structural reforms. An improved growth potential is the best foundation for future fiscal improvements.
The FT editorial writers agree.
What concerns the ECB, but increasingly also international investors, are the long-term prospects for fiscal sustainability in the eurozone. Standard & Poor's, the credit ratings agency, noted in a report published this week that Germany and France would be facing debt-to-GDP ratios of 200 per cent by the middle of this century, as pension obligations mount on public budgets.
As a result, European institutions and investors should focus far less on the narrow deficit-to-GDP ratios than on the effective fiscal position, including contingent liabilities. The problem is not that France, Germany and Italy have exceeded some arbitrary reference value. It is that, without sharp corrective action, they are headed for long-term insolvency.