Loosening of pact an invitation to Britain

FOR the past couple of years there has been a sometimes worrying and sometimes entertaining sideshow over the single currency's fiscal policy bedfellow, the stability and growth pact.

Last week saw what was to many a very welcome change in emphasis on the exercising of the pact by EU economic and monetary affairs commissioner Pedro Solbes.

Partly aimed at wooing Britain into the single currency, partly recognising there is room for a little bit of pragmatism without it being deemed a fudge, Mr Solbes accepted that differing fiscal positions from country to country within the Eurozone can result in different interpretations of the stability and growth pact.

As has been mentioned several times in this column, there is a significant hint of irony about the whole stability and growth pact phenomenon given that Germany is currently in trouble over a possible breach of the agreement. It was introduced at the behest of the German government in 1998 the final year prior to launch of the currency when support for the euro in the country was waning. Germans due to the prospective loss of their beloved D-mark and with what seems to be a genetically programmed an endemic fear of inflation forged from a collective memory of 1930's German hyper-inflation and the part this played in shooing-in the darkest period of the nation's history. Germans started to have cold feet about sharing its money with such monetary profligates, as they saw it, as the Italians amongst others.

A political solution arrived, keeping with the theme of political solutions and political will which drove the euro into being, with the German government arm-twisting the members of the euro-applicant fraternity into signing up to the stability and growth pact. Since its inception there have been two schools of though on the pact.

THE first broadly welcomes it as the fiscal rulebook for membership of the euro club and it provides a clear fiscal framework by which member countries should run their national budgetary positions. The effect is thus to keep a broad sameness around fiscal policy and so deliver a prudent fiscal parallel for the and nobody would argue with this prudent monetary policy exercised by Wim Duisenberg's European Central Bank. Indeed, Mr Duisenberg often makes statement supporting the pact and the need to protect its integrity by rigorously applying it.

The second school of thought around the pact abhors it as a perversion of macroeconomic orthodoxy. It threatens countries with fines over the exercise of fiscal polices In recessionary periods the fiscal positions are likely to be threatening breach of the pact and countries are thus under threat from fines. At times like this countries can ill-afford to foot the bill for fines. Indeed, the monetary fines associated with the fiscal breach are such that they would exacerbate both the fiscal deterioration and further cash-strap governments at a time when an anti-cyclical spending boost for the economy is most needed.

The pact is the antithesis of the advisory headline in The Economist a few years ago when Japan's recession first deepened. Aimed at the Japanese government, the headline told the oriental politicians to 'Spend damn it!'

Last week saw the orthodox view begin to hold some sway with Mr Solbes. He suggested a temporary loosening in fiscal policy is not a problem so long as the subject country has a reasonable debt position and a set of sound underlying budgetary policies.

Most cogently this announcement answers Gordon Brown's concerns over the pact and Mr Solbes went so far as to acknowledge that Britain is a special case because of its sound underlying fiscal position. Come into my parlour

David Merriman, Bank of Ireland, Douglas, Cork