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Euro countries take deficit limits with grain of salt

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Petros Giannakouris/AP/File

(Read caption) A European Union flag billows in the wind with the Parthenon temple in the background on the Acropolis in Athens. To ensure a crisis like the one in Greece wouldn't happen again, the EU decided upon a new "stability pact" which set specific deficit targets for all countries, Karlsson writes.

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When the euro was created there was a number of criteria countries that wanted to join had to meet, most notably regarding budget deficits and debts. But in the end, they decided to ignore it, as only Luxembourg of the original 11 countries met all the criterias, and neither did Greece when it 2 years later joined even according to the official numbers (as Greece "cooked its books" the real numbers were of course far worse).

And then later, as the two biggest countries, France and Germany, exceeded the 3% limit, they used the political  influence that goes with being the two biggest countries to avoid the punishment they according to the rules were supposed to have, using the argument that the problems were only temporary and that they'll better themselves.

Germany actually did  better itself,  as is illustrated by how Germany has had the highest per capita GDP growth in Western Europe in the latest 5 years and has in sharp contrast to almost all others achieved a balanced budget and dramatically lowered unemployment.

However, France didn't better itself quite as much (and has since Francois Hollande unfortunately became President in fact taken a turn for the worse), and what's worse, this violation of the rules made others, including Greece, feel that they can break the rules as well, causing, together with the fraudulent accounting practices of the Greek government, the Greek crisis, that indirectly created problems elsewhere, and very directly caused the problems in Cyprus

To supposedly ensure that something like what happened in Greece won't happen again, they decided upon a new "stability pact" which set specific deficit targets for all countries. Now France is violating it again, and it seems like despite the pledges that "this time we're serious" they will again let it pass.

This doesn't mean that France will go unpunished. If there's one thing recent events has told us it is that it is dangerous to engage in fiscal profligacy if you don't have your own printing press, though France so far has gotten away surprisingly and undeservingly easy. But this again illustrates that when governments tries to show their commitment to responsibility by pledging to follow certain rules, it is worth nothing, if the people who evaluate whether the rules are followed are the politicians themselves.

This is a lesson not just applicable to euro area "stability pacts" but also to inflation targets in for example Britain.


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