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NOVEMBER 28, 2001 SPECIAL REPORT: THE AGE OF THE EURO EC Austerity Is Backfiring Euro zone rules are stifling recovery Several countries--notably recession-bound Germany -- will be lucky to keep their deficits below the 3% ceiling laid down in the 1997 Stability & Growth Pact. The pact required European Union members to balance their budgets over a four-year period -- meaning a deficit in one year has to be balanced by a surplus in another. ``Like other governments, we based our projections on the expectation of solid economic growth,'' says a Finance Ministry spokesman in Berlin. Instead, Germany got a sudden and severe slowdown -- just as its neighbors did. Economists now predict that the euro zone economy will grow just 0.6% next year, compared with the European Commission's original estimate of 3%. Thomas Mayer, chief economist at Goldman, Sachs & Co. in Frankfurt, calculates that each 1% shortfall in GDP growth boosts the cumulative euro zone budget deficit by around 0.5% of GDP. Because of the Stability Pact, governments don't have much room to stimulate demand by cutting taxes or boosting state spending. In fact, they are obliged to pursue policies that exacerbate the business cycle, injecting more money into the economy when it is growing and less when it slows. Things won't change for the better very soon. On Nov. 21, senior European Central Bank officials hinted that they would tolerate a loosening of the Stability Pact next year if the economic situation deteriorated much further. But that will be too late to ease the current downturn. Germany, France, and their European partners are finding that financial rigor may not be as beneficial as they had hoped.  By David Fairlamb in Frankfurt Edited by Peter Coy Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | NOVEMBER |
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