[A-List] EU stability & growth pact: another nail in its coffin

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

EU could relax budget rules in event of war
By Haig Simonian in Berlin and George Parker in Brussels
Financial Times: February 11 2003

The European Union's rules on budget deficits could be relaxed in the event
of a war in Iraq, according to plans being discussed by Germany, France and
the UK.

The step would be justified on the grounds that sticking to the rule
limiting deficits to 3 per cent of gross domestic product would be
inappropriate when economies were suffering from the turmoil of war.

While Germany and France remain opposed to taking part in any military
action, unlike Britain, their economies could suffer from any overall
fall-out from war.

Discussion has so far been limited to the three governments. However,
officials say the idea would be put to all EU finance ministers if the
United Nations Security Council were to approve a second resolution backing
military action against Iraq.

Gerhard Schröder, the German chancellor, yesterday gave the first official
hint of the plans when he spoke to leaders of his Social Democratic party.
Andrea Nahles, an SPD left-winger at the talks, quoted the chancellor as
saying: "There won't necessarily be a business-as-usual approach at the
European level to budgetary consolidation."

The approach was indirectly confirmed by Olaf Scholz, the SPD's general
secretary. "At the moment, there is no loosening of the consolidation course
. . . but naturally, everyone has to prepare for the various possible
economic developments that could take place," he said.

Germany is particularly at risk because of the weak economy, expected to
grow by no more than 1 per cent this year. The country, which was formally
reprimanded because of its 3.75 per cent budget deficit last year, is in
danger of exceeding the deficit ceiling for a second year running.

With unemployment reaching 4.6m last month, Mr Schröder has come under heavy
pressure from left-wingers and trade unionists to relax borrowing limits and
move to a more expansionary policy to avoid recession.

Relaxing the rules on the euro could also suit France, which has clashed
with the European commission over budgetary policy, and some other member
states.

Such a step would almost certainly be fiercely opposed by the commission,
unless the circumstances were urgent. Pedro Solbes, monetary affairs
commissioner, warned at the weekend that Germany had to stick to its pledge
to reduce the underlying deficit by 1 per cent in 2003.

He is unimpressed by suggestions that the stability pact should be relaxed
even before war in Iraq has been declared.