[A-List] EU stability & growth pact: prepare to ditch

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

Fresh doubts emerge over EU stability pact
By Hugh Williamson in Berlin
Financial Times: November 5 2002

France and Germany raised fresh questions about the European Union's
stability and growth pact on Monday when they called jointly for the
policymaking framework to take more account of inflation and unemployment.

The finance ministers of both countries, speaking in Berlin, denied they
wanted to change the pact's strict focus on budget deficits. But their call
for the European Commission and EU governments to stress other factors
points towards further evolution of the EU's rules.

Romano Prodi, the Commission's president, was on Monday night hauled in
front of the eurozone finance ministers' meeting in Brussels to defend his
description of the stability pact as "stupid" - a comment that infuriated
smaller countries which stuck to the rules.

Mr Prodi said he wanted the pact to be applied "intelligently". "Applying it
strictly and achieving growth are not incompatible: both can and must be
achieved," he said.

The united front presented by the ministers of the eurozone's two biggest
economies gives their ideas considerable weight.

Frances Mer, French finance minister, argued that "five parameters" should
be used to measure a country's economic performance - its budget deficit;
inflation; employment-related issues; the national debt; and what he termed
the "quality of future preparations". That was interpreted as including
investment in research and development, and possibly in pensions.

Mr Mer said these issues should be "progressively introduced into the
stability pact in order to refine it", with an initial emphasis on the
"short-term" issues of inflation and employment.

Both he and Hans Eichel, German finance minister, later denied that the
proposal was aimed at changing the central focus of the stability pact on a
country's budget deficit - a focus both said they supported.

"[The proposal] is about improving economic co-ordination [within the EU],
not integrating these issues directly into the pact," Mr Eichel said.

Despite the denial, their initiative is likely to shift the debate on the
future of the stability pact, which has recently focused on its apparent
inflexibility in the face of econom ic downturns.

Pedro Solbes, EU monetary affairs commissioner, warned on Monday night that
the proposals would not affect his intention to apply the pact's strict
rules to Germany and France. But he was already preparing proposals to make
the pact more flexible for countries with low levels of debt.

The Franco-German initiative was also seen as an effort to deflect criticism
from Germany and France's failure to stay within the pact's 3 per cent
budget deficit criterion.

The ministers also called for a stronger role for the European Commission in
economic pol icy co-ordination. Mr Mer said: "The Commission should have the
right to initiate action, including in bilateral relations with member
states."