The Euro’s Greek Tragedy

AMSTERDAM – When the euro was introduced in 1999, European countries agreed that fiscal discipline was essential for its stability. While the common currency has benefited all countries that have adopted it – not least as an anchor in the current economic crisis – the failure of euro-zone members to abide by their agreement risk could yet turn the euro into a disaster.

Indeed, too many members simply behave as if there were no Stability and Growth Pact. The state of Greek public finances, for example, is “a concern for the whole euro zone,” according to European Commissioner for Monetary Affairs Joaquin Almunia. Greece’s fiscal deficit is expected to reach 12.7% of GDP this year, far exceeding the SGP’s 3%-of-GDP cap.

Of course, every euro-zone country is breaching the SGP’s deficit ceiling as a result of the current crisis. But consider the Netherlands, which will do so this year for only the second time since 1999. When the Netherlands first exceeded the SGP limit – by only 0.1% of GDP – the government immediately took tough measures to rein in the deficit. Germany and Austria behaved the same way. Those countries are already working to reduce their crisis-inflated deficits as soon as possible.

Down in southern Europe, things look very different. Exceeding the SGP’s deficit cap is the rule rather than the exception. Indeed, throughout the euro’s first decade, Greece managed to keep within the SGP limits only once, in 2006 (and by a very narrow margin).