The EU stability and growth pact had many flaws. However in choosing effectively to abandon it in the midst of a major row, EU finance ministers have acted unwisely. Now the euro zone is left without any functioning budgetary rules and a significant split between the Commission and the majority of finance ministers.
The European Central Bank has been quick to express its displeasure. While its initial statement might be seen as something of an overreaction, its concern about longer-term slippage in budgetary discipline is understandable. An increase in interest rates may now be closer.
The immediate impact of the decision not to impose stability pact rules on France and Germany may be limited. The ECB is unlikely to push up interest rates immediately. And the reaction on financial markets, which had long thought that the big two member states would escape sanction, was limited. However the move creates considerable political and economic uncertainty.
In the political arena, the Commission must now decide whether it will take legal action to try to enforce the stability pact rules. Doing so would risk a major confrontation with EU governments, many of whom have already moved to block proposals to give extra powers to the Commission as part of the ongoing EU constitutional discussions. In turn, this raises broader questions about the economic management of monetary union and the extent to which financial integration will be accompanied by deeper political union.
The decision is not likely to have any major impact on next week's Budget. The Minister for Finance, Mr McCreevy, will argue that it is common sense to keep borrowing at a moderate level. Given his support for the pact in the past - after the attempt to reform it last year failed, he said that the pact's rules had to be adhered to - it is perhaps surprising that he voted in favour of suspending the disciplinary procedure against France and Germany. Mr McCreevy and the Tánaiste, Ms Harney, have, however, indicated that ideally they believe the pact should be more flexible. It may now fall to the Government to broker a revised pact during the Irish presidency in the first half of next year.
Certainly, it would be damaging to confidence to have no budgetary rules for the single currency area in the long term. Given that the current rules are now inoperable, the best course is to start talking soon about a revised pact. To be credible, it does need to be more flexible than its predecessor, but it also needs to be enforceable. On both of these counts, the current pact has failed the test.