Monday, October 21, 2002

More on Europe: the Devil’s pact

The Stability pact doesn’t seem that stable anymore

When even the President of the European Commission says that the European Stability Pact is “stupid” you know that something is afoot. Everybody more or less agrees that this piece of economic idiocy built into the Euro should go. For those not versed in the European things, the Stability Pact prevents any country inside the Euro to run budget deficit higher than 3% of the GDP in any year. This is to avoid countries free-riding on the low interest rates guaranteed by the Euro to borrow excessively at the expense of the other members.

This straightjacket is equivalent to building a car where the brakes stop working when you are going too fast. When the economy is booming the countries should spend less and when it is depressed they should spend more to sustain investments and consumer spending, exactly the opposite of what the Pact prescribes. This is economy 101 but I suppose none of the European financial geniuses that wrote the pact bothered to take that exam at college.

So now Europe is saddled with an economy that is struggling and Governments that cannot pump some new energy in it but, following the pact, should give their country the kiss of death of a lower spending in a recessing economy.

Anyway, the short story is that pacta non sunt servanda and everybody is going thier own direction. I hope the EU has the sense to speed up a new framework: there is nothing worse than a law so rigid that nobody can obey it. But, this time, Mr. Prodi and co. let’s re-write some rules that make economic sense please!