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The Wall Street Journal March 23, 2005 REVIEW & OUTLOOK Send in the Clowns March 23, 2005 In one memorable scene in Monty Python's "Life of Brian," the character played by John Cleese tries to rally his less-than-eager troops to fight the Roman occupation of Judea. What have the Romans ever done for us, he rhetorically asks. Quite unexpectedly and much to his frustration, the men come up with an impressive list of Roman achievements, forcing the exasperated leader to slightly rephrase his question. "All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?" We are reminded of that scene following Sunday night's meeting of European Union finance ministers about the Stability Pact, which resulted in a deal riddled with so many exceptions as to render those budget rules meaningless. In theory, the pact limits public deficits to 3% of gross domestic product but in practice several euro zone governments have been in breach for years. The deal hammered out by Luxembourg Prime Minister Jean-Claude Juncker, who thanks to the rotating presidency currently chairs these meetings, is a work of comic genius. No wonder he received standing ovations from his colleagues. According to the agreement, the 3% limit still applies except -- are you ready? -- except when the excessive deficit is due to spending on the following items (you had better write this down): education, innovation, research and development, employment, public investment, reducing debt, pension reform and such lofty and conveniently vague goals as fostering international solidarity and achieving European policy goals. Apart from that, the stability pact remains intact. No, really. Mr. Juncker, though, was not the author of this farce. Instead, it was Germany and France that pushed for it. "Fostering international solidarity" is a cave-in to French demands to exempt development aid and defense spending from the deficit calculation. It looks like Paris will be able to subtract such budget items as the costs for intervening in its former colonies. So France's 4,000 troops stationed in the Ivory Coast -- not to mention its one police-training officer for Iraq -- are write-offs. Who knows, should France ever decide to resume nuclear tests in the Moruroa atoll, it might be able to book those under "fostering international solidarity" as well. "Achieving European policy goals" is code for giving budgetary leniency to Germany due to the fact that it transfers each year 4% of its GDP to the former Communist East of the country. A burden, as the German government never tires of reminding the rest of the world, no other government has to shoulder. It is for good reason that no other government has ever attempted a social engineering project of such a massive scale. Fifteen years after unification, more than ¤1.25 trillion have been transferred to the East but Berlin has little to show for it. Unemployment remains about twice as high in the East as in the West and economic growth is even below the anemic West German level. A little liberalization would go a lot further toward making the East prosper, and cost a lot less as well, but thanks to Sunday's log-roll, Germany will be able to continue with this folly without having to feel any pressure to change course. It is objected, with reason, that the old rules were arbitrary and inflexible, something that we pointed out here at the outset when we predicted the breakdown that has now occurred. Our fear then was that they would be an excuse for maintaining high taxes. But they embodied a principle with some sense -- that spending one's way out of short-term economic trouble was no long-term solution. And Sunday's charade had more than a whiff of double standard about it. When little Portugal breached the deficit limit, it was met with the full force of the EU law. In 2000, Ireland, whose economy is one of the few great European success stories, was even reprimanded for conducting a fiscal policy deemed too expansionary and thus fueling inflation. But as soon as the deficit limit became a problem for the governments of the two biggest euro-zone countries, the rules are immediately rewritten or, to be more precise, eviscerated. Worries that lax fiscal discipline would prompt the European Central Bank to raise interest rates pushed two-year euro-zone government bond yields up sharply Monday. The risk that euro-zone governments might over time abandon fiscal discipline altogether has clearly been recognized. And this would be no laughing matter. -- ----------------- R. A. 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