Germans Split on Future of Stability Pact

In the wee hours of Tuesday morning, Hans Eichel finally got his way. Finance ministers of the 12-member euro zone voted to hold off on sanctions against Germany for violating the Stability and Growth Pact for a third year in a row next year.

Only Eichel's Austrian, Finnish, Dutch and Spanish colleagues had voted against a reprieve, thereby following a proposal by the European Commission.

That body, especially EU Monetary Commissioner Pedro Solbes, wanted to force Germany to slash at least €5 billion ($5.9 billion) from the budget to bring its deficit in line with pact regulations. The Stability and Growth Pact, which was established to maintain a stable euro across the monetary union, requires member countries to keep their deficit below three percent of gross domestic product.

A success for job growth, a black day for Europe

In exchange for not pressing for penalties, the German finance minister assured the euro zone ministers that he will reach the three-percent goal by 2005. Despite getting away with little more than a political commttment, Eichel described the compromise as "very demanding for Germany."

Back at home, members of the ruling Social Democratic (SPD) and Green parties were more jubilant than that. "This is a success for job growth," said SPD parliamentarian and finance expert Joachim Poß, reiterating the government's argument that EU sanctions would have damaged German reform plans to revive the country's staggering economy.

But things sounded quite different when listening to opposition leaders, who are currently in tough negotiations with the government over an extensive reform package and will likely attack Eichel during a budget debate due to start late Tuesday.

"This is a black day for all of Europe," Friedrich Merz, the Christian Democratic Union's finance expert, said. He added that Eichel was responsible for burying the pact.

CDU mourns its brain child

Like Merz, many members of the opposition see Tuesday's decision as an unofficial end to the Stability Pact, saying that by refusing to impose sanctions on Germany, the euro zone has been disabled its only tool to guarantee the strength of the euro.

They mourn the fact that Germany, which under the former CDU government pushed for strict adherence to the pact, has now become one of the countries to threaten its survival.

Back in 1992, EU countries had set down so-called convergence criteria for euro zone membership. They included healthy state budgets, stable exchange rates and low interest rates.

Worrying that smaller countries would fail to watch their finances once part of the euro zone, Germany wanted more security and in 1996, the Stability and Growth Pact was created, setting up a system of sanctions for member states which fail to keep budget deficits below three percent of GDP for three years in a row.

A exchange of roles

"Now there's a danger that the three big ones, Germany, France and Italy, will try to sneak around the goals of the pact at the expense of small and medium-size countries who have worked hard to reach those goals," Theo Waigel, Germany's finance minister at the time of the pact's creation, told German public television on Tuesday. "This is an immense loss of face for Germany."

Waigel disagreed, however, that the decision to go easy on Germany had handed the pact its death sentence. "It's not damaged," he said. "The countries that damage the pact damage themselves. Without the pact we wouldn't have this discussion."

Waigel said he saw the current situation as an exchange of roles, with smaller countries holding deficit sinners like Germany to the rules they themselves created. "But at the same time, we have a culture of stability that has never been there before," he said.