The European Union pushed through a change in their economic policy that will allow France and Germany to escape punishment for outspending EU limits on debt. Both countries have long defied the EU deficit limits, and instead of enforcing the limits and prompting some reform of the cradle-to-grave social spending that the limits required, the EU simply threw in the towel:

European finance ministers agreed late on Sunday to ease the Growth and Stability Pact rules which eurozone members must abide by.

The new rules will make it easier for eurozone countries to keep their deficits within 3% of national income. ... Under the deal, Germany can exclude its reunification costs and France will leave out military and aid spending.

Reunification costs? German reunified fifteen years ago. I've heard of long-term depreciation, but this sounds ridiculous to me. It's a license to cook the books, as the bond markets have already discovered this morning. The BBC included a reference to its own analyst warning that this deal could cause an increase in interest rates and a decline in bonds, two events that an investment-hungry EU can ill afford, but as the Financial Times reports, that's exactly what they will get:

Eurozone government bond prices fell on Monday and yields rose as the market reacted to an agreement reached over the weekend to rewrite the European Union's stability and growth pact.

The EU fancies itself as an economic powerhouse that will rival the US for growth and prosperity. However, until they create a stable environment for investors and resolve their deep problems with funding their creaky social systems, the EU will simply drag its members to the economic bottom by tying the albatross of Franco-German economics around their necks. So far, they haven't shown any capacity to address that meaningfully.

UPDATE: My good friend and brilliant economist King Banaian explains this much better than I do. Thank goodness he agrees with me, or I'd have to buy him breakfast the next time we meet before the Northern Alliance Radio show. Be sure to read all of King's instructive post, and if you don't already have SCSU Scholars blogrolled -- especially for economic commentary and first-hand analysis of Eastern European developments -- don't hesitate do so now.

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