gE Mini-Blog Series: Currency Part 3 - The Great Euro Debate

The issue of euro-area governments exceeding standards for allowable debt has led to calls for tighter regulations and sanctions against nations that do not exhibit fiscal responsibility. While it is difficult for a large and diverse organization such as the European Central Bank to reach a consensus on any major policy, recent scares have opened the discussion of proposed regulatory changes.

The “Stability and Growth” pact adopted in 1997 states that euro-countries must keep budget deficits under 3% of GDP and total dept under 60% of GDP. Driven by fears of inflation, this policy is intended to ensure that member nations are not endangering the value of the currency as a whole.

While attempts to enforce this policy against France and Germany were blocked by financial ministers from the large member nations, punitive measures have been pursued against smaller Portugal and Greece with some success.

New proposals are intended to avoid a crisis such as that which occurred earlier this year. Officials were forced to determine how they would support Greece when bond rates in the country elevated to 10% due to high perceived financial risk. Would the European Central Bank itself sell bonds to raise money for an at-risk member? How far would individual nations go to protect the value of their currency? France and Germany disagreed on how the euro-nations should react, although the dispute was eventually resolved with a compromise.

Legislation proposed on Wednesday would impose a fine of .2% of GDP for countries ignoring EU recommendations to resolve budget issues. Nations with total debt greater than 60% of GDP would be expected to reduce that debt by 5% each year.

As the debate continues, discussions will focus on the overarching issue of whether government controls can facilitate economic competitiveness or if the market should be left alone to regulate itself. While any new law must first be passed by the European Parliament and the European Council, there are sure to be many strong proponents on both sides.

Can the euro-nations find a resolution that is acceptable to all members, or will this debate be the breaking point?