Bloomberg
December 16, 2011
Only a few months ago, there was an intense debate and a lot of resistance in Germany to setting up the European Financial Stability Facility and European Stability Mechanism. Part of the resistance wasn’t about the billions of euros lent to weaker partners in the currency, but about whether the German parliament was giving away too much sovereignty.
Against this background, the fiscal compact the German Chancellor Angela Merkel has pushed for, and which now will be included in a new treaty, must have come as a surprise. After all, the new rules give away even more national sovereignty.
The agreement all but cedes the euro-zone countries’ individual rights to borrow in financial markets and reduces their national parliaments’ room to set policy. This can only be understood in the context of the very specific German debate. Within Germany, the perception is that the Germans have been fiscally responsible and that the new treaty is just putting into a binding rule what the country has been doing all along.
Although this perception isn’t quite correct, given Germany’s violations of the Stability and Growth Pact in the early 2000s, it holds a grain of truth: The new rules are modeled after a rule that Germany wrote into its constitution in 2009, limiting structural deficits to 0.35 percent of annual output. As long as the German budget is in line with the German constitution, the country has no problems fulfilling the new commitments.
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