The Monster Turns on its Creators

France and Germany (especially Germany) were among the principal architects of the EU’s “Monster” — the Stability and Growth Pact, an agreement written in 1992 wherein all countries joining the euro are required to keep any budget deficits below 3.0% of GDP. The economic reasons for imposing such a limit are slightly complicated, having to do with the fact that a country in a currency union (like the euro countries) can essentially “export” the bad side-effects of large budget deficits to the other members of the currency union. The political reasons for the Pact are less complicated: In the early 1990s Germany wanted to raise the bar for entry into the common currency area, hoping to keep out (or at least delay the entry of) certain “fiscally irresponsible” countries like Greece and Portugal. The plan worked, sort of; Greece and Portugal were not kept out of the euro, but they were forced to rein in their budget deficits.

The problem is that now it is France and Germany who are breaking the 3.0% limit on budget deficits, while Greece and Portugal are abiding by them. According to the Pact’s provisions, if you break the limit for three years in a row then the European Commission is supposed to levy fines on the offending country. We’re not talking about a little slap on the wrist here, either; the fines could be in the tens of billions of dollars. The monster takes big bites.

Today these fines came one step closer to reality. The finance ministers of the EU countries had sought to prevent the European Commission from levying the fines, but today these efforts were ended.

Why is this significant? No one likes the Stability and Growth Pact, and the rules may well be amended or dropped in the near future. But nevertheless, we may soon see a country fined for running excessive budget deficits, probably for the first time in history.