The headline on this editorial in the Wall Street Journal was the first clue.
Know-Nothings Deal Euroland A Double Blow
In case you are wondering what this refers to:
European governments are showing their true colors. First, they gang up on the EU services directive, which was supposed to be a cornerstone of what remains of the Lisbon Strategy. Then, over the weekend, they emasculate the Stability Pact, with France and Germany in the front seat, arguing that, after three years of running deficits above 3% of GDP, they need even more time to bring fiscal policy under control.
The authors -- Daniel Gros, Thomas Mayer, and Angel Ubide, members of the Macroeconomic Policy Group at the Center for European Policy Studies in Brussels -- have this complaint about relaxing the Stability Pact rules:
The pact was supposedly made more stringent by exhorting euro-zone countries to use good times to prepare for bad times and telling them to take debt levels into account when judging a fiscal deficit. But no changes in the legal text were called for in these areas, and experience has shown that these provisions have no teeth in any case.
Most of the criticism from economists had been concerned with these two points: Ideally the pact should foster adjustment in good times, and countries with high debt levels should be even more cautious in running deficits. Here Europe's finance ministers decided to do nothing. By failing to improve the preventive arm of the pact, they have sown the seeds of its own future failure.
On the Services Directive, Finffacts Ireland has this useful description:
The Services Directive aims to create a single EU market for such services as accountancy, legal services and construction.
Service providers would be able to operate throughout the EU according to rules in force in their home country, a change which critics fear would drive down wages and working conditions in richer countries.
Again from the WSJ article:
The confused reaction to the services directive, again especially in France and Germany, also reflects a disregard for economic reality coupled with a desire to protect the status quo at all costs. The calls to review the country-of-origin principle, agreed at the highest political level, betray either a dangerous -- but unfortunately widespread -- ignorance, or a shameful disingenuousness. The country-of-origin principle is the guiding principle behind the entire body of internal-market legislation and its basic tenets are enshrined in the EU Treaty and have been repeatedly confirmed by the Court of Justice...
The EU decision Tuesday night to send this directive back to the drawing board to "preserve the European social model" says a lot about what Europe's leaders are prepared to undertake to get the European economy moving. In other words, not much.
Gros, Mayer, and Ubide agree with previous warnings from ECB president Jean-Claude Trichet...
Last year, we argued that the ECB should be patient in order to give the nascent recovery a chance and thus give euro-area governments a window of opportunity in which to enact serious reforms. So far the ECB has been patient indeed, keeping rates at historically low levels and allowing liquidity to expand beyond the level considered consistent with long-term price stability. Since governments are now showing, however, that better times aren't used to pursue structural reforms, the ECB needs to change course. The credibility of governments has collapsed; the ECB must assert itself as the last guardian of macroeconomic stability in the euro zone...
These two actions will surely raise inflation fears at the ECB: Fiscal discipline can no longer be taken for granted, persistent inflation in the services sector is likely to continue and the badly needed sizable gains in potential output will be foregone. The ECB must thus redouble its vigilance, and stand ready to raise rates when inflation shows signs of increasing again.
... and close with this pessimistic assessment.
In a broader perspective, it is revealing that in both cases (the saga of the pact and the services directive) the two Euroland heavyweights, France and Germany, are in the front line of those resisting adjustment. It does not bode well for the future of Europe when economies that were supposed to be the motors of European integration have become its main brake.
UPDATE: David K. Smith piles on as well.