BY THE TIME THEY GET TO PHOENIX (via Mike Daley)

Europe's Deficit Cap Becomes Rule Often Broken (MARK LANDLER, July 4, 2003, NY Times)

While Germans are seething over the damage done to European unity by the intemperate remarks by Prime Minister Silvio Berlusconi of Italy at the European Parliament this week, the bigger threat to unity may come from Germany and its red-ink-stained finances.

By announcing that it would move up a sweeping tax cut to recharge its economy, Germany is almost certain to violate a treaty-imposed ceiling on budget deficits for a third consecutive year.

Germany's decision was far less provocative than Mr. Berlusconi's words, likening a German member of the European Parliament to the leader of a Nazi concentration camp. (He apologized today.) But it may have broader long-term ramifications, according to economists and political experts here.

A chronic violation of the rules by Germany ? which has Europe's biggest economy and insisted its neighbors cap their deficits as a precondition of adopting a single European currency ? could effectively vitiate the agreement, known as the Stability and Growth Pact.

France this year will also breach the deficit ceiling, which is set at 3 percent of gross domestic product, while Italy and Portugal are skirting the edge. All told, countries representing 71 percent of the total economic output of the euro zone no longer comply with its fiscal rules.

"The pact has basically been put on ice until the Germans and the French get their act together," said Daniel Gros, the director of the Center for European Policy Studies, a research institute in Brussels. Once Europe's torpid economies recover, the pact, Mr. Gros predicts, "will rise like a Phoenix from the ashes."

As Mr. Daley says, it would be a bit easier to listen to the Euros whine about our unwillingness to be bound by international agreements if they obeyed such themselves. Posted by Orrin Judd at July 4, 2003 8:08 AM