[A-List] EU stability & growth pact: ECB weighs in

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

ECB and eurozone battle over stability pact

Charlotte Denny
Friday October 25, 2002
The Guardian

The European Central Bank waded into the row over Europe's fiscal rule book
yesterday, blasting France and the other large eurozone members for failing
to cut their budget deficits as promised.

Responding to the furious debate between member states over the stability
and growth pact, which limits eurozone countries' borrowing, the ECB said
the rules were "indispensable".

Last week the head of the European commission, Romano Prodi, dismissed the
pact as "stupid" and Paris has made it clear it has no intention of starting
to cut its budget deficit next year to meet the rules.

But the ECB blamed member states for failing to clean up their finances,
insisting the pact had to be maintained in its current form. "Problems have
arisen not because the rules are inflexible, but as a result of some
countries' unwillingness to honour their commitments to respect the rules,"
the statement said.

Economists fear the ECB may postpone desperately needed interest rate cuts
for the faltering eurozone economy to punish Europe's political leaders for
meddling with the pact which was intended to safeguard the credibility of
the euro. "The game of chicken between the ECB and EU finance ministers
continues and it would seem now likely that the ECB will cut rates in
December rather than November, given this particular intervention," said
economist Julian Callow at CSFB.

In a separate development, the EU's commissioner in charge of enforcing the
pact, Pedro Solbes, said Germany could avoid a fine for breaching the 3%
ceiling on borrowing this year if it promised to take action in 2003.

Mr Solbes, speaking after a meeting with German finance minister Hans Eichel
in Berlin, said he was happy with the budgetary commitments of Germany's
centre-left government, which signed a new coalition deal last week.

"The coalition agreement gives a clear sign that decisive steps are being
planned by the German government to bring the deficit back below 3% next
year," Mr Solbes said.

Germany was the main cheerleader for the pact when it was agreed ahead of
the euro's launch. Mr Eichel said yesterday that Berlin would accept
whatever disciplinary procedures the commission decided on.