[A-List] EU stability & growth pact

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

Inside Brussels: Solbes picks up the pieces
By George Parker
Financial Times: October 24 2002

The body language said it all. Pedro Solbes, the EU monetary affairs
commissioner, is furious with his boss, Romano Prodi, for calling the
stability and growth pact "stupid".

This week in Strasbourg, Mr Solbes looked on stoney-faced as the European
Commission president defended his comments with the assertion: "It is time
we said in public what we say in private."

It is doubtful whether Mr Solbes has ever called the stability pact "stupid"
, even in private. Publicly and privately he defends the pact as the
foundation stone of the euro, even if he shares Mr Prodi's belief that he
should be interpreted more flexibly.

For more than an hour Mr Solbes sat alongside Mr Prodi in the European
parliament, and the two men barely acknowledged each other's presence. When
Mr Solbes finally addressed MEPs, his words sharply diverged from those of
his boss.

"I believe the pact provides the member states with rigorous, as well as
flexible, rules to meet the short, medium and long-term policy challenges
the union is facing," he said.

Mr Prodi says he has no regrets about using the word "stupid" to describe
the pact. But Mr Solbes has plenty of time ahead of him to regret the
Commission president's choice of words.

No wonder his mood is dark, as he contemplates how he is going to force
member states to comply with a pact which has been ridiculed by Mr Prodi,
the supposed defender of EU rules.

He is also pondering the political fall-out across Europe. How does the
Portuguese government, for example, convince voters that its painful cuts in
public spending and wage freezes are essential to comply with rules which Mr
Prodi himself rubbishes.
Mr Solbes's camp say there is no question of him resigning. "If anyone
should have resigned over the affair, it is not Mr Solbes," sniffed one
ally.

Mr Prodi says he is pleased to have started a debate, and few would disagree
with his analysis that the pact needs reform. But for the time being, Mr
Solbes and the 15 EU members are stuck with it, and there is no obvious
agreement on what to put in its place.

"Prodi's comments were stupid, because they risk throwing the baby out with
the bathwater," said one well-placed observer. "It is all very well to have
a debate, but you have to have something to replace the pact.

"We should be using the stability pact as the starting point, and then build
from there."    Mr Prodi wants to have more power to enforce the rules of
the euro, including the right to issue formal early warnings direct to
member states in danger of breaching the pact's deficit ceiling of 3 per
cent of GDP.

Many see the merit of such a plan. Currently the Commission can only propose
reprimands and sanctions against fiscally irresponsible countries, but they
can be blocked by EU finance ministers at their monthly Ecofin meeting.

Indeed an analogy is sometimes made where Mr Solbes is the referee at a
football match, but when he blows the whistle for a foul the players can
decide to overrule him.

The only problem with Mr Prodi's model is that it is highly unlikely to
happen. The finance ministers, particularly from the big countries, don't
like being told what to do by Mr Solbes; they would rather stitch up deals
behind closed doors at Ecofin.

Mr Solbes has already set out plans to make the pact work more intelligently
in the short term, for instance by focusing more on structural deficits.

In the longer term, the pact may be rewritten, possibly in the new EU treaty
due to be signed in 2004 and ratified in 2005.

It may even incorporate some of the UK's fiscal and monetary framework,
which is deemed by Mr Prodi and others in the Commission to be more flexible
and growth-orientated.

But for the time being, Mr Solbes is left to pick up the pieces and try to
enforce what's left of the pact's tattered credibility.

Next month he is expected to issue an early warning to France over its 2003
budget plans. It will be fascinating to see whether EU finance ministers are
willing to support him.

And it will be even more fascinating to see whether France, which delighted
in Mr Prodi's "stupid" remark, will pay a blind bit of notice.