In a landmark decision the European Court of Justice has ruled that EU euro-group finance ministers were wrong to suspend the Stability and Growth Pact rules last November. In doing so they avoided imposing fines on France and Germany, proposed by the European Commission for breaching its rules on state indebtedness. The ruling bolsters the pact's legal credibility, but will provoke another round of debate as to its relevance in a period of such uncertain economic performance.
The Stability and Growth Pact was drawn up under the Irish EU presidency in 1996 and came into effect the following year. It was substantially a German initiative, taken to reassure a nervous public opinion there that accepting the euro would not undermine the deutschmark's famed stability by amalgamating it with weaker currencies. The pact spells out the quantitative fiscal rules applying to the euro, notably by saying that deficits should normally not exceed three per cent of gross domestic product without risking substantial fines.
The political passion generated by the dispute arises from the very effective application of the deficit rules by Italy, Spain and Greece to gain entry to the euro. This was followed by stringent action by Austria and the Netherlands after it started to avoid being fined. These smaller states do not see why large ones such as France and Germany should not face the same medicine.
The Commission's sole right to propose the fines was at stake in this dispute. This is a crucial guarantee of its independent role as the guarantor of EU interests and rules. The court found the finance ministers were entitled to reject the Commission proposal, but that putting the rules in abeyance exceeded their powers. The decision to do so was annulled. When it comes on the agenda in the autumn there will be further argument about whether, and how, the pact should be reformed to take better account of economic realities. France and Germany say they are now committed to reduce their deficits but say there should be more flexibility implementing the rules to take account of economic cycles.
This is a sensible approach. The existing pact is imperfect and was drawn up in a very different political context. It is, however, the only set of rules in place. Until debate and research on how much economic governance the euro requires have been more fully developed it would be ill-advised and dangerous to change the rules arbitrarily. The Dutch EU presidency will certainly defend the pact, having put such political energy into preventing opportunist amendments. But those who believe it must be maintained should not refuse to discuss how it can be improved.
The euro is operating as an effective world currency, having been established successfully over the last five years. This ruling will reinforce its credibility and protects the Commission's role as guardian of the rules governing it. As with all institutions, it will evolve and develop and needs a running agenda of reform.