Europe’s Instability Mechanism

The new European Stability Mechanism may stabilize Europe in the short run and help it to withstand better the current speculative attacks on the euro. But while financial contagion today is limited to bank interaction, the EU’s measures have broadened the channels for contagion to include government budgets.

MUNICH – By 2010, Europe was to be “the most competitive and dynamic knowledge-based society in the world.” This was the official proclamation in 2000 of the European Commission in the so-called Lisbon Agenda. Now a decade has passed since that bold pledge, and it is official: Europe is the world’s growth laggard rather than its champion. While current EU members grew by 14% over the last ten years, North America grew by 18%, Latin America by 39%, Africa by 63%, the Middle East by 60%, Russia by 59%, Singapore, South Korea, Indonesia, and Taiwan by 52%, India by 104%, and China by 171%.

The Europeans wanted to achieve their goal through, among other means, further environmental protection and more social cohesion – desirable aims, but certainly not growth strategies. The Lisbon Agenda turned out to be a joke.

The European Stability and Growth Pact of 1995 has fared no better. EU countries agreed to limit their fiscal deficits to 3% of GDP to ensure debt discipline under the euro, so that no country could use the new currency to take its neighbors hostage and force them into bailout operations. In fact, the EU countries exceeded the 3% limit 97 times.

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