Rules Are Rules, Even If They Are 'Stupid'

A careful observer once said that in politics a faux pas is what happens when somebody tells the truth. On October 17, Romano Prodi, president of the European Commission, said the European Union's budget rules—which are helping to keep Europe's biggest economies in recession—are "stupid." This is true. Almost nobody in Europe disagrees, in fact. As a result, Prodi's comments aroused consternation within the commission and set foreign and finance ministers reeling right across the Continent. People are now asking whether the "gaffe-prone" Prodi (this is not the first time he has told the truth) had better resign.

Should anybody in the United States care one way or the other about Europe's budget rules or about the European economy in general? Yes. Let me advance two arguments in support of this outlandish claim.

First, the quarrel about budgets reveals a lot about the strange entity that is developing across the Atlantic—and is going to figure ever more prominently in America's foreign-policy calculations. Second, America's economic expansion has been faltering lately. Something that would help a lot is a faster revival—or any kind of revival—in the economies of France, Germany, and Italy. Stronger demand for American exports is just what industry needs. Europe's fiscal policy system, working in tandem with a European Central Bank of questionable judgment, are among the chief reasons why no such revival has taken place. Europe's budget system is harming not just Europe, but the United States and the rest of the world as well.

What do Europe's budget rules—humorously designated the "Stability and Growth Pact"—actually say? There are three main provisions. Each government promises to: keep budgets in balance or surplus over the medium term; submit budget projections for the scrutiny of other members; and pay penalties if its budget deficit should exceed 3 percent of national income, unless there are "exceptional circumstances." This phrase is defined to mean not merely a prolonged slowdown or an ordinary mild recession but a pretty severe recession (a fall in output of more than 2 percent over the course of a year).

You did not need to be a genius to predict at the outset that these rules would sooner or later require European governments to raise taxes and cut public spending during an economic slowdown—instead of doing the opposite, as common sense and elementary economics would advise. So it has proved, and the euro is not yet one year old.

To avoid breaking the letter of the rules, Italy has resorted to accounting fiddles that would make an Enron executive blush, and it may break the rules nonetheless. The other euro countries knew all along that Italy would cook the books and most likely still fail to comply. That is Italy's traditional role. More surprising to the Europeans is that Germany, which insisted on the rules to begin with, also now expects to violate the pact, notwithstanding its Teutonic self-denial (despite a stagnant economy, Germany has already announced higher taxes and lower spending). France's budget deficit may go above 3 percent of income as well—but France, conforming to stereotype as predictably as Italy, says the rules can go hang.

Then Prodi announces that the rules his own commission is required to police are stupid. This must mean that the farce is finally at an end, right? Not so fast, say Europe's smaller countries. We have spent the past few years struggling to cut our deficits. Why should the big economies be exempt? We suffered from these rules, now it's their turn. Quite right, Germany replies. We are terribly serious about these rules, which we are admittedly about to break because we do not want them to wreck our economy completely. We value them, we honor them—even as, regrettably, we break them. These rules are not stupid. How deplorable of Prodi to say that. Has the man entirely lost his senses? Mind you, he is Italian.

It is a quintessentially European shambles. So delicate is the emerging European polity that the semblance of agreement on any issue is regarded as more important than the actual substance of what is agreed to. In Germany and in other countries, the budget rules are retarding growth and needlessly destroying jobs. That makes it all right to break the rules or ignore the rules. What you cannot do is question the rules, mock the rules, or call for the rules to be changed. It took many months of difficult negotiations to get agreement on those rules. The rules are not stupid.

Britain's ongoing problem with the European Union has something to do with this attitude. Britain has a hang-up about wanting an undertaking to make sense before agreeing to it. This is an instinct Britain shares with the United States. It is one reason why both countries are reluctant multilateralists. In much of the rest of Europe, governments believe that agreeing to something is what matters most—that is the most difficult thing, the most challenging thing, but ultimately the most rewarding thing. Worrying too much about the substance of any agreement is so unhelpful. What does it matter anyway since, in the end, you can always ignore what you have agreed to?

The budget rules are a perfect illustration. The reaction to calls for changing those rules is equally revealing. Abandon an agreement? Unravel all those negotiations? You don't know what you're asking. Well, yes, we understand that the rules have worked out badly. What's your point?

Critics of the European Union complain of a democratic deficit: They say that European institutions are insufficiently accountable to Europe's citizens. This is true, but the problem is worse than that. The need for agreement elevates procedure over content. Because of the reluctance to grapple with substance, there is a gap where politics—any kind of politics, democratic or otherwise—should be.

Some would argue that last weekend's Irish referendum refutes this charge. Europe's governments signed the Treaty of Nice in February last year, another in a long series of agreements that strengthen the power of EU institutions and nibble away at the power of member states. The treaty was partly concerned, but only partly, with changing voting and other rules in ways that would make business easier to conduct once the EU has been enlarged to include new members from Eastern Europe. Last weekend the Irish government put the treaty to its voters in a referendum, and they backed it by a big majority. No democratic deficit there.

Think again. To begin with, Ireland is the only country that bothered to put the treaty to a referendum. So just 3 million voters out of a total of 300 million across the European Union were actually asked their opinion. (Other governments have had bad experiences with referendums on Europe. They now prefer to avoid them.) Also, this is the second time Ireland has been asked to vote on the treaty. The first time, voters rejected it, rightly fearing that the political clout of small countries such as theirs would be diminished by the treaty. That was not the right answer, however, so the government demanded that voters try again. Now that they have given the required answer, a third poll will not be necessary.

Worst of all, Ireland was told by its own government, and by every minister and senior official the EU could deploy, that if they rejected the Nice treaty, they would be closing the door on the new members who so badly want to join. This swayed the vote, as you might expect. It was, in fact, untrue. As Prodi confirmed in an earlier faux pas, enlargement of the EU could perfectly well have gone ahead without the Nice treaty and all its extra baggage. So while the Irish did come closest of all Europeans to having a careful debate about the merits of the treaty, in the end they were conned into backing it. That is all right, though, because in attempting to discuss the substance of the treaty, you see, the Irish were missing the point.

At the moment, European unity is not all it might be. The EU is split over the war on terror. Britain has sheered off, siding with the United States; France, as usual, is delighting in laying obstacles in America's path; and Germany is trying to row back from the outright anti-Americanism that Gerhard Schroeder and the Social Democrats cynically adopted during the recent election campaign. On some issues, it seems, the quest for European solidarity is just too challenging.

But when the European Union next affects to speak with one voice about what Europe wants or believes, do please keep those budget rules in mind. Because those rules are not stupid, and Europe believes in them, it really does.