At the beginning of 2002, European politicians were celebrating the long-awaited arrival of euro bills and coins on the streets of the Continent. It was seen as a milestone on the road to a truly united Europe.
Just a few months later, the concept of an integrated European economy is facing one of its biggest tests yet. The precipitating factor is the worsening dispute between France and Germany, the two acknowledged heavyweights of the euro zone, who are battling over budgetary policy. Both countries are expected to run budget deficits this year equaling 2% of gross domestic product or more. And unless the Continent makes a swift and dramatic economic recovery, the two nations' chances of getting to a balanced budget by 2004 are in doubt. That's the deadline, set at a March meeting in Barcelona, where the leaders of the European Union countries promised to end their budget deficits.
While the German government still pledges publicly to meet the 2004 goal, French President Jacques Chirac backed away from the budget promise following his reelection in May. After facing the challenge from rightist Jean-Marie Le Pen, Chirac is focused on solidifying his domestic support by cutting taxes and boosting spending on police and the courts. As a result, France now expects to run a budget deficit until at least 2007.
The split between Germany and France could cause enormous political and economic distress within a Europe already stuggling with a wide array of problems. Continued budget deficits could keep the euro weak, force the European Central Bank to boost rates sooner, and generally slow down the recovery.
France's decision to focus on domestic needs while postponing actions on its budget illustrates the limitations of the European Union. The EU countries have been talking about integration for years while avoiding the tough questions, including much-discussed rules for bringing in new members, and how to enforce competition policy across countries.
It's time for the European countries to make a choice. Either they move forward into closer economic and political union or they remain a loosely tethered collection of independent states linked mainly by a common currency. Either way, the easy work is done.
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.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
