[A-List] EU stability & growth pact: UK membership closer?

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

Eurozone relaxes rules of 'unravelling' stability pact
By Stephen Castle in Brussels
The Independent, 28 November 2002

The guidelines governing the euro - labelled "stupid" by the European
Commission president - underwent sweeping changes yesterday.

After weeks of speculation, the European Commission announced plans to
loosen the economic straitjacket on EU economies by interpreting guidelines
more flexibly and taking into account the countries' levels of debt.

The move comes at the end of a year in which criticism of the so-called
Stability and Growth Pact has grown steadily louder. While the currency
itself has strengthened recently on the foreign exchanges, the rigidities of
its rulebook have been exposed cruelly by the economic slowdown.

With Germany and Portugal now in breach of public-deficit targets, and
France and Italy giving cause for concern, the pact has, in effect,
unravelled, less than four years after the launch of the single currency.

At a press conference yesterday, Pedro Solbes, the EU's economic and
monetary affairs commissioner, reiterated his commitment to the central
pillar of the pact: the budget deficit ceiling of 3 per cent of gross
domestic product (GDP). This is designed to underscore the central objective
of keeping public spending, and therefore inflation and interest rates, low.

All countries must also work towards balanced budgets in the medium term,
and governments must reduce deficits during economic upturns as a cushion
against recession, he added. But, under the new blueprint, countries with
low levels of long-term debt, such as the UK and Ireland, will be allowed to
increase investment spending by running bigger short-term budget deficits.
This concession is likely to apply to those whose debt is less than 40 per
cent of GDP.

More leeway to borrow for investment in public services has been one of the
main demands of the Chancellor, Gordon Brown. Although the UK is outside the
12-nation euro bloc, it has to sign up to the EU's economic policy
guidelines.

Meanwhile, the Commission's plan would force highly indebted euro group
members, such as Italy, Greece and Belgium, to make greater efforts to
reduce their debt, making them liable to disciplinary action - and
ultimately fines - if they fail to do so. EU officials said they hoped the
changes would be given political backing by EU governments over the next
three months.

The European Commission president, Romano Prodi, who called the pact
"stupid" last month, said yesterday: "We must learn from experience and
implement the Stability and Growth Pact in a more intelligent way." He said
that, in the long term, greater powers would be sought to discipline
countries that overspend in good times and fail to curb their deficits in
downturns.

A British official said the Government welcomed the move, which "looks to go
some way towards the UK's prudent interpretation" of the pact.

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EU moves towards Brown's model

Andrew Osborn in Brussels and Mark Milner
Thursday November 28, 2002
The Guardian

As Gordon Brown was using his pre-Budget report to mount a robust defence of
Britain's economic policy framework, the European commission yesterday
announced moves to bring its own structure closer to the British model.

In a move that europhiles claimed was heavily influenced by UK Treasury
thinking, the commission unveiled proposals to give greater flexibility to
its much-criticised stability and growth pact.

In the event of the UK ever joining the euro, the chancellor fears its rules
would not allow a British government to spend generously on the country's
creaking public services.

Portugal has already broken the rule limiting public sector deficits to 3%
of gross domestic product, Germany will do so this year, while France and
Italy, which also has a debt level that is 110% of GDP, could see their
deficits close to 3% in 2003. All could face fines.

Such circumstance have been cited as a reason why the UK should stay out of
the single currency.

The commission conceded yesterday that more flexibility was needed as was a
far greater factoring-in of extenuating circumstances.

Echoing a phrase of the chancellor's, it said that due account should be
taken of the economic cycle and it also suggested that the requirement for
member states to get their budgets "close to balance or in surplus" should
be viewed in underlying, as opposed to nominal terms, in future.

Brussels also gave an explicit guarantee that public spending should not
fall victim to strict budgetary discipline.

"This is a very significant reshaping of the economics underlying the euro,"
Gary Titley, Labour's most senior MEP, said. "In essence we're taking Gordon
Brown's 'golden rule' and shipping it across the water. With these changes
the euro is becoming the kind of currency Britain wants to join."

One City economist took a similar view. "If the commission is suggesting
taking into account the economic cycle, not only would that get Europe off
the hook in terms of the pact's inflexibility, but it would also get the UK
off the eurosceptic hook."