16 July 2003

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EU rejects French budget leniency bid, warns of fines

- French Central Bank chief nominated to head ECB

European Union finance ministers have rejected French President Jacques Chirac's calls for a temporary exemption from EU budget rules, saying France risks fines if the deficit tops the limit for the third time in 2004.
France broke the EU's three percent deficit ceiling last year and will stay above the limit in 2003. The dozen countries sharing the euro designed the rules to protect the currency, fining violators as much 0.5 per cent of gross domestic product.
France, which is cutting taxes to buoy the economy, has avoided the ultimate penalty by pledging to get the deficit back in line by 2004. The Netherlands and Austria insisted on punishing France should the government break that promise.
"If there are figures in the budget exceeding the three per cent figure, the commission must proceed with arrangements that are in the stability pact," Monetary Affairs Commissioner Pedro Solbes told a Brussels press conference after the meeting of EU finance ministers.

Chirac said yesterday that EU rules setting limits on governments' borrowing should be suspended, allowing them to cut taxes and boost spending to spur economies close to recession. He was immediately rebuffed by finance ministers, the European Central Bank and the European Commission.
"If you go through the 3 percent for three years in a row then we are really in trouble," said Dutch Finance Minister Gerrit Zalm. "There is no reason to exclude France from the agreements that were made."
The economy of the dozen euro countries will probably grow only 0.75 percent this year, Solbes said, less than the one percent he forecast in April. Economic stagnation has prompted deficits to widen as tax revenue dwindles as unemployment rises.
The ECB, which last month cut its benchmark refinancing rate to 2 percent, says governments are doing too little to curb their deficits. Investors are officials fear a third breach by the two largest economies in the euro are would lead the bank to delay further interest-rate cuts.
Finance ministers from Germany, Belgium, Austria, Finland, Spain and Greece also opposed any loosening of the rules. Italian Finance Minister Giulio Tremonti, who chaired the meeting, said the stability and growth pact is flexible enough to let governments boost spending during economic slumps.
Portugal's precedent
Portugal became the first euro user to overstep the limit in 2001, followed by France and Germany a year later. EU governments have so far shied away from slapping the three with fines, which can only be imposed by a vote of finance ministers.
Chirac's call follows Germany's decision to speed up tax cuts to spur the economy, risking a third breach of the deficit limit. Still, Deputy German Finance Minister Caio Koch-Weser insisted "there's no need for changes of an easing of the rules."
Germany was the country who made observance of a limit on deficits its condition for creating the currency in 1999, to prevent countries such as Italy undermining the currency by running up their public borrowing.
French Bank chief nominated to head ECB
European Union finance ministers yesterday nominated Bank of France Governor Jean-Claude Trichet to replace Wim Duisenberg as president of the European Central Bank, EU diplomats said.
Trichet would assume leadership of the ECB - which sets interest rates for the 12 countries that use the euro - as the region faces slow growth and rising unemployment.
The ministers adopted Trichet's nomination for a full, eight-year term, set to begin 1 November, the diplomats said on condition of anonymity. The decision was to be announced late yesterday at a news conference.
The nomination will now be sent to the European Parliament and the ECB's board of governors for approval.
EU leaders agreed on Trichet's appointment during their summit last month - days after a French court cleared him of involvement in a decade-old banking scandal.
Under a 1998 compromise, the leaders made Duisenberg the first chief of the ECB with the understanding that he would step aside midway through his eight-year term. Duisenberg, 67, announced his retirement date last year but agreed to stay on until his successor was in place.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
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