[A-List] EU stability & growth pact

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

Instability and little growth

The EU stability and growth pact is proving even harder to police than it is
to follow, writes Mark Milner

Monday November 25, 2002
The Guardian

When Gordon Brown unveils his pre-Budget report later this week he will have
one advantage over some of his European counterparts. His UK growth
projections for this year and the next might be modest - the Organisation
for Economic Cooperation and Development (OECD) reckons 1.5% and 2.2%
respectively - but they will still look pretty comfortable compared to the
eurozone - 0.8% and 1.8%, on the OECD's calculations.
The OECD's projections for the big players in euroland will have made for
uncomfortable reading in Brussels, as well as in Paris and Berlin. According
to the OECD's number crunchers, French growth will be 1% this year and 1.9%
the next.

Paris reckons that the OECD is being far too conservative (oh yes?). The
French finance minister, Francois Mer, said last week he was aiming for 2.5%
next year. Even if France fell short - and it will - Mer believes it would
still meet the stability and growth pact target of a deficit (the amount by
which government borrowing exceeds income) of 3% of GDP.

The OECD agrees, but it will be a close run thing. It believes the French
deficit will be 2.9% in 2003 - near enough to the ceiling to justify
Brussels' request that France is shown the stability and growth pact's
equivalent of the yellow card.

The German numbers look even worse. The OECD reckons that not only will
Germany break the stability pact rules this year, it will do so again next.
If it is right, expect fireworks. Two successive years of deficit in excess
of 3% could - and should - mean fines.

Little wonder, then, that both Germany and France would like to see the
pact's rules rewritten to take account of such minor adjustments as
inflation, job creation, pension funding, debt levels etc. As if that list
were not long enough, the French would also like to see defence spending
excluded!

France and Germany are not the only countries in the firing line. Last week,
the EU's monetary affairs commissioner, Pedro Solbes, took careful aim at
Italy. Indeed Solbes might be described as emptying both budgetary barrels
in the direction of Rome.

First he argued that Italy was only managing to follow rules on the amount
by which its deficit should be reduced through a fudge - including one-off
measures that have not been counted. He claimed the Italians were using such
budgetary sleight of hand "relentlessly". Without such extra measures, he
warned, next year's deficit will be 2.9%.

But Solbes had a more damaging criticism. Not only was Italy fiddling the
deficit arithmetic, it was also backsliding on commitments to reduce its
overall debt levels. The Maastricht treaty on monetary union specified that
government debt in member countries should not be more than 60% of GDP.

Surprise, surprise - the rules were waived for Belgium and Italy and, later,
for Greece, on the specious grounds that though they were in excess of the
set level (around double in the case of Belgium and Italy), at least
progress was being made in the right direction.

According to Solbes, Italy is no longer making progress on cutting debt
levels which stand at more than 110% of GDP. Unless Rome starts to get its
act together, he warned, it could face action from the EU. Don't hold your
breath.

The idea of the EU simultaneously taking on Germany, France and Italy in any
meaningful way over matters budgetary is as ludicrous as the stability pact
itself.

· Mark Milner is the Guardian's deputy financial editor