[A-List] EU stability & growth pact woes

["Keaney Michael" <Michael.Keaney@xxxxxx>]

EU's big boys override rulebook on budgetary limits

Week in Europe Ian Black

Ian Black

Europe's central bankers may not be losing much sleep over worries that
new euro coins contain so much nickel that consumers get irritating
allergies on their fingers.

But there was no disguising the annoyance last week when governments
split down the middle over the controversial rule book governing budget
deficits in the single currency zone.

With Gerhard Schroder safely back in power in Germany, and disruptive
national elections out of the way now for a couple of years, it was
unfortunate timing for an angry row over the so-called stability and
growth pact, designed to ensure that eurozone governments keep within
agreed spending limits.

It was the European Commission that triggered the spat by proposing the
extension of the earlier 2004 deadline for balanced budgets, allowing
governments to run a deficit for two more years and underlining how
serious the continent's economic slowdown is.

The point of the pact is to sustain confidence in the euro and to ensure
that profligate budgets do not cause inflation and problems for other
members - all sharing the single interest rate set by the European
Central Bank (ECB).

Simply put, deficits should be no more than 3% of gross domestic product
and budgets should be balanced in the medium term.

Pedro Solbes, the European Union's Spanish commissioner for economic and
monetary affairs, judged it prudent to wait until after Schroder's
victory to announce the delay - and to deliver the bad news that
Germany, the EU's largest economy, might soon exceed the limit.

Earlier this year Schroder had to do some fancy footwork to avoid
becoming the first eurozone member to be reprimanded for breaching the
rules. That was ironic for the country whose mighty Bundesbank, worried
about freeloading by less disciplined countries, insisted on the pact as
a precondition for scrapping the deutschmark.

What was widely seen as a fudge was supported by Britain's Chancellor of
the Exchequer, Gordon Brown, who was unhappy at any suggestion that
Brussels should interfere in national fiscal policy.

Before that crisis Ireland had been sharply rapped over the knuckles
because of its overheating economy, causing resentment at home. But it
is after all only a small country on the fringes of the continent, as is
Portugal, the most serious current offender.

Germany, by contrast, pays a whopping quarter of the entire EU budget.

Now, however, the scale of the problem is growing. With the eurozone
growth forecasts being revised downwards to less than 1%, France and
Italy - where Silvio Berlusconi presides over a vast public debt - are
perilously close to breaching the ceiling.

France's president, Jacques Chirac, is in no mood to be told what to do
about spending: his summer election promises included lower taxes and
more cash for law and order and defence. France has also proposed
exempting military expenditure when calculating deficits.

Smaller eurozone countries, forced to swallow strong medicine to meet
their commitments, reacted badly to what looked suspiciously like
special treatment for the big guys.

"A two-class system with large euro states that don't have budget
discipline and small states that maintain their discipline would not be
acceptable," protested the Austrian finance minister.
Spain, where Prime Minister Jose Maria Aznar, a former tax inspector,
has tried hard made to meet the 2004 target, was furious. The Dutch
government worried that the pact was becoming a "moving target". Belgium
was angry too.

Their fear is that, in a free for all to bend or ignore the rules, the
ECB would be forced to raise interest rates, increasing borrowing costs
and stunting sluggish growth.

So the crisis has highlighted the need for a new look at the existing
arrangements. Solbes has already called for countries with sound public
finances to be able to run modest deficits to fund investment. That is
the sort of change that will please the British treasury, which regards
the pact as an obstacle to joining the euro.

Critics see the pact as a poorly designed straitjacket that must be
loosened: what is the sense, they ask, for a government with a deficit
close to the limit being forced to slash spending and raise taxes even
if their slowing economies need the stimulus?

Putting off the problem will not help. Since every EU member - inside or
outside the eurozone - faces the twin problems of ageing populations and
a rising pensions burden, deficits cannot continue to swell. If they do,
economic performance will simply not improve.

Just to illustrate the point, the new target date of 2006 happens to be
the year when Schroder faces his next appointment with German voters. As
one commentator noted, he is unlikely to be campaigning on an austerity
ticket.

Shorn of its technicalities, the debate about the stability pact goes to
the controversial heart of the way the euro - a common currency not
backed by a single government and national budget - works.

It poses tough questions, such as whether member states can be forced to
cut social security benefits or scrap school or hospital building plans
when recession looms.

Final answers are nowhere in sight yet. But it is altogether a more
serious matter than itchy fingers.

The Guardian Weekly 3-10-2002, page 6