Europe’s finance ministers agreed last week to review each other’s national budgets in the future to prevent one or several member states from imperiling the stability of the common currency as happened in Greece this April. The move may end being a step in the right direction but little more than that.
The finance chiefs of the European Union met in Luxembourg on June 7 where they first approved the €750 billion rescue mechanism that was put in place by their government leaders in the wake of the Greek crisis before discussing broader measures that should help prevent such a calamity from developing again. Besides the controversial peer review procedure — which, according to The Blue Nation, Britain, for one, will never accept — tougher sanctions should be enacted whenever member states violate the eurozone’s budget rules.
The existing Stability and Growth Pact prescribes that eurozone countries cannot maintain deficits over 3 percent of GDP and must prevent the size of their national debts from rising above 60 percent of GDP. The treaty allows members that are in violation of its rules to be fined yet throughout the euro’s eleven year history, many countries, including France and Germany, have waved the rules several times while no one dared propose sanctions.
The new peer review scheme is similarly lacking in strength. Germany has pushed for tougher sanctions since March with support from smaller Northern European states like the Netherlands, but the European Commission, so far, has hesitated to submit to such ideas. Before anything else, it is desperate to prevent further discord among the member states.
Measures that could actually force European government to abide by the rules — such as temporarily denying them voting power or withholding access to European funds — have quietly been pushed off the table, in part because many governments are struggling to cope with increasing Euroskepticism at home and dread the prospect of having to enact another major accord after the eight years it took to pass the Lisbon Treaty.
Another initiative that been silenced to death was Germany’s suggestion, supported by Finland and the Netherlands, to introduce the possibility of an “orderly sovereign default” for eurozone members. Other governments feared that to so much as speak of default in this climate would unnecessarily upset financial markets.
In general, much of Europe has been annoyed by Germany’s unilateral push for austerity and reform. Chancellor Angela Merkel startled markets and neighbors alike last month when her administration abruptly banned naked short selling of eurozone government debt and financial stock, as well as naked credit default swaps involving eurozone debt which are blamed by some for deepening Europe’s ongoing debt crisis. Both European Council President Herman Van Rompuy and European Commission President José Barroso told the chancellor last week that they oppose new institutions and treaties to deal with the situation. “We do not need new institutions to meet our goals,” a statement released by Van Rompuy’s office read. “We need more effectiveness.”
The chancellor should prepare to face many frustrated colleagues in Brussels June 17 when European leaders convene to discuss European economic governance. They will discuss economic policy again in Toronto a week later when the G20 summit starts there on June 26.