Daniel Drezner has a solid post on the death of the EU's Stability and Growth Pact. As he notes, the agreement had put a limit on the deficits of member states, and repeated violations were supposed to trigger harsh fines. It was implemented to get those silly irresponsible countries like Italy, which had serious fiscal problems, to behave. Now that the unsilly and responsible France and Germany are misbehaving, it's time to chuck it out.
The truth is the S&G Pact does need to go, though the proximate cause of its death shouldn't have been this kind of "crisis," but rather a sober reassessment. On one hand, the EU needs something to keep its member states fiscally responsible (oddly, in the US, a wave of balanced budget amendments had states impose it on themselves). On the other hand, unlike the US the EU doesn't have countercyclical federal spending policies which guarantee that, to some degree, states which are performing poorly relative to the average get an infusion of federal dollars. Telling underperforming countries that the central bank isn't going to help with monetary policy, and that expansionary fiscal policy is off the table, may not be the right approach.
And, yes, we're all Keynesians now...
