In the Financial Times of 7th September was an article co-authored by Mark Rutte and Jan Kees de Jager, respectively Prime Minister and Finance Minister of the Netherlands. The article begins by pointing out that it is not only necessary to find a solution to the current crisis in the Eurozone, but also to think about long term improvements to the functioning of the currency union that will help to protect against future crises. It goes on to outline proposals for such measures, all of which empahsise the need for credible, independent oversight to ensure that budgetary rules are followed and (increasingly severe) penalties imposed when they are not. A recurring theme throughout the article is the need for these rules to be both written and enforced, the former of which Eurozone states demonstrated their aptitude at in the run up to EMU, though the latter has been somewhat lacking.
While Rutte and de Jager do not spell this out in their article, it is interesting to consider that one of two main culprits behind the utter irrelevance of Eurozone budgetary rules is in fact the state that today stands behind the banner of ‘no forgiveness for rule breakers’ in questioning Eurozone bail outs. That is, of course, Germany. In the lead up to and after the Stability and Growth Pact (SGP) crisis of November 2003, during which Germany and France escaped the Excessive Deficit Procedure despite breaching the 3% of GDP deficit ceiling under the SGP, the German government stated that they would not impose further austerity on the struggling domestic economy in order to adhere to EU spending targets. Following that crisis and throughout the reform debate over the SGP, the German government pushed for looser regulations on national spending, such that a government would have the room for maneuver to prop up a struggling economy in times of need. Meanwhile, the Dutch argued emphatically against reforms that would weaken Eurozone budgetary rules.
The SGP, reformed or otherwise, could not have prevented the current situation in the Eurozone. In fact, as I have argued previously, a well functioning SGP might have caught Greece a bit earlier, but would have done nothing for the likes of Spain or Ireland, both of which were SGP model citizens in the run up to the financial crisis (in 2007, Ireland: 28.3% GDP and +0.2% GDP; Spain: 42.1% GDP and +1.9% GDP). Rather, the SGP saga serves to highlight the irony of German politicians, economists and citizens professing a misunderstanding of why Greece cannot meet the budget targets imposed on them. Surely it is just another case of a national government responding to limits set by the domestic situation before addressing international requirements. Further to that, Germany was not on the brink of large-scale civil unrest at the time of the SGP crisis, whereas more dramatic consolidation efforts now might well push Greece in that direction.
It is only fair to say that, following the replacement by Angela Merkel of Gerhard Schroeder as German Chancellor, the government of the former has done very well to get their economic house in order and to navigate the financial crisis, so that falling foul of the SGP is now less of a concern than rising inflation. However, one thing that will surely threaten this economic turnaround is if the Germans continue to insist that the Greeks either implement certain reforms or be left to their own devices.
It is easy to see why Germans and others have grown weary of Greek failure to meet the commitments attached to their bailouts, and it is easy to see why the Dutch, among others were angered by France and Germany flouting the SGP rules. Yet, as was the case then and is the case now, the decision to adopt a common currency has already been taken, along with the increasing interdependence that entails. The decision now is whether to risk the dissolution of the Eurozone or bend the rules a bit more to save Greece and all those that would be affected by their collapse.