Experience has taught us not to take the labels the European Union chooses to place on its many and various "pacts" at face value.
The Stability and Growth Pact was cooked up in 1996 and singularly failed to meet either of its two goals. Patently, the euro zone has neither been stable nor characterized by strong growth.
So it is with the new Competitiveness Pact, which German Chancellor Angela Merkel and French President Nicolas Sarkozy are trying to foist on their counterparts in the rest of the euro zone, so far without much success.
Few of the measures being proposed under the pact are likely to make the euro zone's members more competitive, either within the currency area or relative to other economies in the rest of the world.
Instead, they are intended to improve the public finances of the "peripheral" members by ensuring that they behave more like Germany. And on one issue—corporate taxation—the pact looks likely to damage rather than enhance competitiveness.
While it may not be what its authors claim it to be, many of the measures included in the pact are of value, such as raising the age at which workers are entitled to start claiming pension payments.
But the German and French governments haven't done a very good job of selling the pact, and that's partly down to the fact that while it involves pain and political risk for other euro-zone members, it ignores most of the problems that confront the bloc's two giants.
Finance ministers from the euro zone are working Monday and Tuesday to find compromises that will make a deal possible by the time European Union leaders meet at the end of March. But even if a deal can be reached, the euro zone may not have done itself many favors. Not for the first time, it has drawn attention to the fact that it needs to improve its long-term growth potential, without doing so.
Agreeing to raise the retirement age makes an awful lot of sense for the euro zone. Standard & Poor's estimates that without further reforms to state-funded pension programs, German government debt will rise to more than 400% of gross domestic product by 2050, French government debt to more than 403%, Italian government debt to over 245%, and Spanish government debt to over 544% of GDP.
And enshrining limits on borrowing and debt levels in national constitutions doesn't seem a bad way of restoring trust in the financial management of euro-zone governments, which don't have a great deal of credibility left.
But it's unclear how either of those two measures would directly boost competitiveness, or the ability of euro-zone businesses to produce world-beating goods and services at low cost.
The steady loss of wage competitiveness relative to Germany has been one of the troubling and underlying causes of economic difficulty for a number of euro-zone members since the launch of the single currency. Putting an end to wage indexation does look like a move that would help the competitiveness of the small number of countries that still indulge in the practice, which ensures that a relatively high inflation rate is inevitably translated into higher wages without any guarantee of increased productivity.
But the clearest sign that the Competitiveness Pact isn't about competitiveness is the proposal to set a minimum corporate tax rate, which would undoubtedly be higher than the lowest rates currently applied by Ireland, Cyprus and Hungary.
In a paper published last week, five economists from the Organization for Economic Cooperation and Development, working with Christopher Heady from the University of Kent in the U.K., examined the impact of tax changes in 21 developed economies over the past 34 years.
Their conclusions aren't ambiguous. If the goal is to boost growth, "corporate taxes appear to be the taxes that should be reduced most."
Ireland's 12.5% corporate tax rate has long rankled with German and French policy makers. Their main objection is that companies looking for access to the EU market set up in Ireland in order to minimize their Europe-wide tax payments.
Ireland gets the jobs, but at the cost of depriving other EU members of corporate tax revenue. And they argue that leaves Ireland with a narrow tax base and makes its public finances vulnerable to the collapse of a single sector—such as construction.
There is an argument to be had, and France and Germany may be right. But this isn't about competitiveness, it's about boosting tax revenue.
The EU did have a competitiveness pact: the so-called Lisbon Agenda, which was launched in 2000, ran until last year, and was intended to raise the bloc's long-term growth potential. It promised a great deal more than it delivered, and any serious attempt to make the euro zone more competitive would revisit the Lisbon goals and make sure they were met at the second time of asking.
The Lisbon Agenda had promise because it tried to compare EU members with other parts of the global economy, identify where they were weak, and where there were better ways of doing things.
Reviewing progress over the 10 years of the Lisbon Agenda, the Centre for European Reform awarded top marks to the Netherlands. And therein may lie a glimmer of hope.
Arriving at the meeting of Euro Group finance ministers Monday, Dutch Finance Minister Jan Kees de Jager made it clear his government has much to contribute.
"It's not a diktat as such, but we can't just accept the ideas of France and Germany," he said of the Franco-German pact. "The Netherlands has ideas about this too. We do need to discuss competitiveness and strengthening it is very important. But …this proposal is just a starting point for discussion."
