Now that the European Central Bank has cut rates, critics are focusing on the recessionary impact of another pillar of the system of Europe’s monetary union – the strict limits on budget deficits.
It has been compared to a medieval torture chamber, and countries caught in its embrace are finding the pain almost too intense to bear.
But can the Stability and Growth Pact (SGP) be tamed without undermining the credibility of monetary union?
It is a question which has been vexing policy makers in the eurozone.
The pact – which constrains the budget deficit of the 12 member countries in the eurozone to no more than 3% of national economic output – is a crucial plank of its economic policy.
But the strength of the political commitment to the pact is being sorely tested by the current weakness of the eurozone economy.
Four countries – Germany, France, Italy and Portugal – which together account for nearly four fifths of output in the eurozone – either breach or are on the verge of breaching the 3% limit.
They are bridling at threats of cash fines by the European Commission if they fail to toe the line.
Germany in particular needs to find a way out of its current economic malaise.
The fear is that raising taxes or cutting spending to try and balance the books would merely depress the economy further.
Most economists agree that the principles underlying the pact are basically sound – it is their implementation that is faulty.
There simply has to be a mechanism to ensure financial discipline in the eurozone so as not to undermine the single currency.
And, because eurozone countries no longer have control over their own interest rates, fiscal policy – tax and spending – needs to be doubly effective in smoothing out the economic cycle.
David Walton, the director of European economic research at Goldman Sachs, is scathing on its shortcomings:
“The pact is a one-size-fits-all policy that makes no distinction between countries where there are concerns about debt sustainability, and those that have very low levels of debt,” he says.
“In its present weak state the last thing the eurozone economy needs is an unnecessarily restrictive fiscal stance.”
But the Commission is in a bind with regard to reform because of the danger of undermining the new-found credibility of the euro.
Tinkering with the pact to suit Germany also sets a bad example to new nations about to join the EU which have been lectured at great length on the virtues of financial discipline.
Given these constraints, it is perhaps no wonder that moves so far to reform the pact have been something of a fudge.
Last week Pedro Solbes, the commissioner responsible for economic and monetary affairs, announced proposals for a slight loosening of its rules.
Countries will be given until 2006 to balance their budgets, instead of the previous target of 2004.
Mr Solbes also wants it to be more flexible and to concentrate on structural deficits – excessive borrowing not linked to the ups and downs of the economic cycle.
But there was no hint of the wholesale reform which some had expected.
He warned: “We will continue to act in a decisive and robust manner if deficits breach the 3% of GDP – or if member states fail to achieve and sustain budget positions of close to balance or in surplus.”
Not far enough
To critics of the pact, this still maintains pressure on countries in danger of breaching the pact to tighten fiscal policy by raising taxes and/or cutting spending.
The weakness of the eurozone economy arguably demands that policy operate in the opposite direction.
The trouble is that any move to dismantle the pact now will look like panic in the face of economic difficulty.
Further reform will probably be postponed until about 2005, when recovery should be under way.
A new EU treaty which will include a framework for economic management will also be due then.
The favourite alternative to the Stability and Growth Pact is a version of the Golden Rule in use in the UK.
This distinguishes between general spending and investment – with the latter excluded from any limits on borrowing.
Investment in infrastructure is considered self-financing and does not fuel inflation.
Fans of the UK’s arrangements point to its faster growing economy and low inflation.
Moving closer to the UK model would also remove one of the main worries of UK Chancellor Gordon Brown over British adoption of the euro.
Other possibilities include setting rules that look at spending levels instead of deficits and take more account of the ratio of debt to GDP.
Adopting these targets would give countries a lot more flexibility in coping with their particular economic problems.
Whatever replaces the SGP, for many countries in the eurozone, it can not come fast enough.