Euro Zone Agrees to Follow the Original Rules
In the fiscal accord reached here on Friday by members of the European Union, the nations that use the euro essentially agreed to go back to Plan A — that is, the principles and rules with which they created their common currency two decades ago. Only this time, they said, they mean it.
The central aim of the deal is to make it harder for the 17 members of the bloc that use the euro to ignore stringent rules that they had pledged to follow long ago. And to make that outcome more likely this time, the accord creates a center of coordination and decision-making in Europe.
All 17 members of the European Union that use the euro, plus 6 other members — Denmark, Latvia, Lithuania, Poland, Romania and Bulgaria — agreed to subscribe to a new treaty, which binds them more closely, enforces more fiscal discipline and makes it harder to break the rules. Britain rejected the plan, while Hungary, Sweden and the Czech Republic left the door open to sign up.
At the heart of the accord are the fiscal requirements that were laid down in the treaty that led to the creation of the euro as a common currency 20 years ago; it called for the euro zone countries to limit budget deficits to no more than 3 percent of gross domestic product and to restrain overall debt so that it remains below 60 percent of annual economic output. Originally, there were sanctions for exceeding these limits, but when Germany and France found themselves doing so the idea of punishments was scrapped.
Once the European Commission, the bloc’s executive body, suggests sanctions for violating the rules, a country will need a weighted majority of nations to prevent them from being enforced. The new mechanism will make it more difficult for countries to avoid punishment.
The provision limiting a nation’s total debt, which had not been taken seriously, will be applied more forcefully, requiring nations to gradually reduce their level of cumulative debt.
Euro zone nations will also have to submit drafts of their national budgets to the European Commission, which will be able to request revisions if it thinks a budget could lead a country to break the euro zone’s rules.
The accord also contains other changes: Governments will have to inform one another about how much debt they want to issue in bonds, and limitations on debt are to be written into national laws or constitutions.
Should countries deviate from the debt limits, an “automatic correction mechanism” will kick in; this is to be designed by each nation in line with principles identified by the European Commission. The European Court of Justice will make sure all nations effectively include debt restrictions in their laws.
“We are committed to working towards a common economic policy,” the nations said in a statement. For all of the accord’s intricacies, skeptics immediately saw potential flaws. Additional aid for euro zone countries that are struggling with unsustainable levels of debt would, at best, buy time for the bloc to create a system that satisfies German demands for budgetary discipline, said Clemens Fuest, a professor at Oxford who has advised the German Finance Ministry.
He estimated that the additional support would provide relief “for perhaps half a year or a year. That is probably the most optimistic scenario.”
Eventually, Mr. Fuest said, the European Central Bank will be forced to relent and become the lender of last resort for nations like Greece, Italy and others members with high debt. The bank’s president, Mario Draghi, has been resisting that role.
Simon Tilford, chief economist at the Center for European Reform in London, says the agreement in Brussels is superficial and fails to address the underlying problems. “It’s little more than a stability pact with lipstick,” Mr. Tilford said.
“It’s hard-wired austerity into the framework of the European Union,” he added. “That’s not going to do anything to solve the crisis.”
But Stefan Schneider, the chief international economist at Deutsche Bank in Frankfurt, said that expectations for a grand solution at the meeting here had been too high. “You can’t make a quantum leap to a fiscal union in one weekend,” he said.