[A-List] EU stability & growth pact: the end?

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

EU may suspend stability pact in event of war
By George Parker in Brussels
Financial Times: February 12 2003

Hopes that Europe's biggest economies would eliminate their budget deficits
by 2006 were receding on Tuesday, amid renewed concern about the economic
impact of a war against Iraq.

The European Commission refused to rule out the possibility of suspending
the European Union's stability pact - the eurozone's budget rules - in the
event of war.

Meanwhile, Germany said it was seeking talks with Britain and France to
discuss a programme for balancing budgets across the eurozone.

There are now rising expectations that the EU might be forced to postpone
again its deadline for reaching "close to balance" budgets within the zone.

Last June, EU finance ministers agreed to give France, Germany, Italy and
Portugal until 2004 to balance their budgets; that deadline was later moved
to 2006.

But with sluggish growth across Europe and finance ministers seeking to
blame the Iraqi crisis for a worsening outlook, even that deadline may have
to be revised.

On Tuesday the European Commission said: "If there were to be a war we would
look at any measures that were appropriate and might need to be taken."

A war in Iraq would at least provide the EU with a way of retaining some
credibility for the stability pact in the face of Germany's chronic economic
problems.

Germany, Europe's biggest economy, broke the pact's deficit limit of 3 per
cent of GDP last year, and Commission officials expect it to do so again in
2003.

If the situation continued for a third year, the EU might be expected under
the Maastricht treaty to start proceedings to impose a fine on Germany.

However, Berlin is exploring with France and Britain the idea of suspending
the pact because of the "exceptional circumstances" of a war in Iraq.

The treaty defines these circumstances as "resulting from an unusual event
outside the control of the member state concerned" - wording usually
interpreted as meaning some form of natural catastrophe.

But senior EU officials confirmed on Tuesday that the wording could be taken
as a reference to a war.

Asked whether the pact might be suspended in those circumstances, the
Commission said: "We'll cross that bridge when we come to it."

A suspension of the pact would allow Germany to carry on running surpluses
over 3 per cent, and would almost certainly remove any prospect of it
balancing its budget by 2006.

On Tuesday Britain and France said there were no specific talks to suspend
the pact, and the issue has not yet been raised at the level of EU finance
ministers. But Berlin confirmed contingency planning was taking place.

A German finance ministry spokesman said:

"We are not talking at the moment about weakening or reinterpreting the
stability and growth pact but how to adapt it to the current economic
situation.

"This applies also to the possibility of an Iraq war, but crisis planning is
not at the moment the central scenario."