Politics: The EU Stability & Growth Pact

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Catherine Feore looks at a bold statement on the EU by a European Commission president.

The heading is misleading. It was said by a European Commission president, but not Ursula von der Leyen; it was Romano Prodi back in the early 2000s when Germany and France were on the naughty step for exceeding their deficits. The quote is from Ashoka Mody’s book Eurotragedy.

Mody quoted Romano Prodi in an interview with Le Monde in 2002, where he said: “I know very well that the Stability Pact is stupid, as are all rigid decisions.” In the European Parliament, Prodi entrenched his comments, calling for an intelligent and flexible approach, adding: “It is time to say the same things in public that we say to each other in private.”

On the way into the European Commission’s press briefing on the review of economic governance and a debate on its future (5 February), Pascal Lamy was spotted in the lobby of the Berlaymont. Mody quotes Lamy, describing the Stability and Growth Pact (SGP) as a “medieval” construct. The most entertaining quote is from the then French Finance Minister Francis Mer, who described the SGP as a “procrustean bed”, which was “too small for some, too large for others, and a torture for all”.

For some, the financial crisis and its aftermath may seem like a thousand years ago, or an extremely painful part of the European Union’s history they’d rather not revisit. The European Commission’s launch of an assessment of the effectiveness of the current framework for economic and fiscal surveillance, especially the six- pack and two-pack reforms that aimed to strengthen the SGP, was greeted by an almost empty press room; a decade ago, it would have been difficult to find a seat. With growth in the last quarter of 2019 recorded as 0.1% both in the eurozone and in the EU-28, we should maybe brace ourselves for a bumpy ride ahead. Without wanting to do a painful post-mortem, we need to learn from the mistakes made.

The European economy commissioner and Italian former prime minister Paolo Gentiloni pointed out that it isn’t just the EU’s growth rate that is low, it is also inflation and interest rates. In other words, the economy is in a close-to-moribund state. These are the rewards of the legendary – and I do mean that literally – “growth-enhancing fiscal austerity”. Contrary to well-established and vindicated economic theory, the EU chose to inflict further pain on its economy at the height of a recession. The thinking was that what the ailing patient needed was not medicine, but a good punch in the guts.

Executive Vice President for the Economy that Works for People Valdis Dombrovskis informed us that the rules on debt and deficits were “essential for the stability of our economies and the eurozone”, making it clear that the consultation they were about to launch would not address the most contested issue. Gentiloni added there was no intention of changing the Treaty on these matters.