The euro zone countries reached an agreement last week that was something of a mystery.  To great fanfare, the 17 members of the euro zone announced that the group would sign a new treaty that would call for automatic sanctions against countries that broke the fiscal rules, like a budget deficit greater than 3%. What makes this a conundrum is that the euro zone already has a similar rule.  Whenever a country has a deficit higher than this there are supposed to be fiscal sanctions or punishments meted out.  But they are not.  When both France and Germany ran higher than allowed deficits earlier this decade they simply decided it didn’t matter.  Now is different!...or so that is what the members say, because now the punishments are automatic.  Really? 

We are to believe that when a country runs a large deficit or has its debt reach high levels it will additionally agree to fiscal sanctions in the form of monetary payments?  This makes no sense.  It is similar to a debtor’s prison – take someone who owes a lot of money but cannot pay and throw them in jail where they cannot earn any more money.  What government, when push comes to shove, is going to willingly fork over funds to the European Commission when they are already dealing with a large debt and/or deficit? 

Maybe the EC will take a check…denominated in Drachmas.

Posted in : Euro Zone 

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