Stability and Growth Pact
Delivered in Plenary 3rd October 2001
The dark clouds of recession are looming in the western world in part due to the piercing of the asset bubble of the US stockmarket, but further exacerbated by the the unexpected shock and downturn in Economic confidence following the September 11th terrorist attacks. The US Federal Reserve has dropped the federal funds rate to a 39-year low of 2.5 percent. This is the ninth rate cut this year. The ECB may respond shortly but almost two years since the euro's launch there is as yet little enthusiasm for its future role as the major international reserve currency. In part the result of exchange rate weakness, and in part because the notes and coins are yet to circulate so it cannot yet be heralded as an unqualified success. It still remains to be seen if the 'one-size-fits-all' model of interest rates will work in countries like Ireland. It is these concerns and the added one of the Constitutional implications and loss of national sovereignty which leaves my country the UK, to remain outside. Although clearly we all wish the project well which frankly has confounded many pessimists including our former Prime Minister John Major.
Some years ago the Commission in its MacDougall Report concluded that central tax raising powers of 7% GDP would be needed to allow countercyclical spending and transfer payments to make a single currency zone function properly. This would of course have been an anathema to member states so they decided on the strict spending, borrowing and inflation limits in Dublin in 1996 as an alternative. Recently there have been calls to loosen up on these ceilings.
This is unwise as I believe firmly in this prudent approach to public finances and borrowing. Furthermore the British economy is linked and becoming more convergent with the Eurozone economy so we all have an incentive to stick to the guidelines and we must not allow the US crisis to be an excuse to a new big government tax and spend policy. The Stability Pact includes mechanisms designed to operate in recession and Article 2(1) (on the "Excesive deficit procedure") may be used if exceptional expenditure is now required to meet increased defence and internal security spending to reinforce the public's safety. Member states should instead concentrate on the tough structural reforms needed to free-up labour markets and also deregulate and privatise state industries rather than return to the bad old ways of spending their way out of a crisis. This will only fuel inflation and increases the mountain of national debt.