Is the European Union imploding?

The prospect of being accepted into the EU provided the nations of Eastern and Central Europe with a strong incentive to achieve fiscal balance - a process somewhat similar to what happened in Western Europe at the time the euro was launched. In both cases, however, after initial progress, countries have shown clear signs of political "fatigue": in the euro area, the Stability Pact has imploded; throughout Eastern Europe, budget deficits have started to rise.

In the Czech Republic last year, the budget deficit jumped to 13% of GDP, a threefold increase since 1999. Although this included a one-time charge for bank restructuring costs, this year the deficit will close above 6% of GDP. In Poland, the deficit is also moving close to 6% of GDP, up from 2.9% in 2001. In Hungary the budget deficit is widening again, after narrowing to 4% of GDP in 2001. Malta, too, has a deficit close to 10% of GDP, up four percentage points since 2001. Only the Baltic countries seem able to maintain sound fiscal policies.

In many ways, this is not surprising: once politicians no longer face annual EU progress reports - and the threat of exclusion - fiscal relaxation becomes much less costly. At the same time, the big euro area members (France and Germany) do not have a leg to stand on to criticize other countries' fiscal policies, so there are virtually no international constraints on EU countries' budget deficits. Indeed, these constraints have proven to be utterly useless after a country's EU entry, and it will be hard to impose them as an admission criterion for other potential entrants.

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