Is Tony Blair sure he wants the UK in the eurozone by 2007 — or any other date? Read:
Under the Growth and Stability Pact, members of the eurozone are not supposed to run up budget deficits of more than 3% of gross domestic product (GDP).
France and Germany, battered by rising unemployment and slowing economic growth, had bust out of those limits arguing that capping spending would hamper a recovery.
The European Commission, the EU’s executive arm, warned them that failure to trim spending would result in censure and eventually large fines.
A compromise was found, with Germany agreeing to cut its budget by about 0.6% of GDP next year and 0.5% the year after. France is looking at 0.77% and 0.6% cuts over the same time period.
That, in theory, should get the deficits of both countries back below the mandated 3% of GDP.
But there is a get-out clause, under which the reductions will not be required if growth in the French and German economies is unexpectedly low.
Kids, this stuff is basic Macro Econ 101.
The eurozone nations, in order to maintain the value of their new currency, have to limit their borrowing. In our country, when Washington borrows too much, we get high interest rates and inflation. Then we vote the bastards out, and get a new batch of bastards who promise to bring some sense to government spending.
In the eurozone, things aren’t that simple. What’s to keep, say, Belgium from swimming in red ink, if the inflationary effect is spread out amongst a host of other nations who all use the same currency? Which is why the eurozone countries adopted a “Growth and Stability Pact” before adopting the euro. Simply put, everyone promised not run deficits bigger than 3% of GDP.
Problem is, it isn’t tiny little Belgium breaking the Pact — it’s Germany and France. They’re the two largest eurozone economies, and they’re also the driving force behind the creation of the euro and the entire European Union. It’s not so much that they’re screwing Belgium (a Franco-German tradition going back centuries), but that they have the ability and incentive to screw the euro.
That’s called the “tragedy of the commons.”
So what’s it all mean? I suppose it means we’ll find out just how sharp the teeth of the EU Commission are — though I suspect they aren’t very.