EU ready to fine budget offenders
Germany and France
- at 7.6 per cent, Malta falls far short of convergence
The European Commission said late last week it was ready
to fine Europe's biggest economies if they kept smashing the region's
budget deficit limits, and took particular aim at France which is planning
Germany and France broke the European Union deficit cap of three per
cent of gross domestic product last year, expect to do so again this
year, and, under EU rules, would risk fines if they exceed that limit
for a third year running in 2004.
The EUs rigid approach to the disputed (on the part of offenders)
rule leaves Malta in a bit of a fix over its declared intention of joining
the process leading up to membership of the economic and monetary union
known as the ERMII as early as possible.
This can only be done if, for starters, Maltas deficit sinks to
three per cent of gross national product. At Lm127.7 million, that deficit
currently stands at some 7.6 per cent of GDP. To correct the situation
Malta will have to either cut its deficit by more than half, or more
than double its GDP.
Malta, of course, still has time to correct the worrying state of affairs
but current EMU members France and German are facing heavy fines from
Both countries face an uphill task to cut their deficits as sluggish
economic activity is depressing tax revenues, but the tax cuts planned
by France's right-wing government are adding to risks that Paris will
breach EU rules for a third year.
"We shall be reminding France of its obligations and then the question
is whether we throw the book at it," European Trade Commissioner
and French Socialist Pascal Lamy said this week.
The tough words from Lamy, who has previously admitted the need to revamp
the EU's Stability and Growth Pact on budget discipline, suggests the
Commission is hardening its line with Paris, and gearing up for a fight.
Nor will the EU executive brook arguments that fines - the ultimate
sanction against repeat budget offenders - might kill any nascent recovery.
"(Sanctions) would not have a heavy financial effect, so they would
not slow growth," European Competition Commissioner Mario Monti
told the Italian business daily Il Sole 24 Ore this week.
"It would maintain confidence in the euro without having a recessionary
backlash on the economy."
No appeasing the EU
French Finance Minister Francis Mer tried to offer a sop to the guardians
of the EU budget rules by saying he would aim to reduce its structural
deficit, which excludes the impact of economic swings, by 0.5 percentage
points of GDP in 2004.
But that is not guaranteed to bring its headline deficit below the EU
limit next year.
The Commission made it plain it would have no qualms about calling for
fines against either France or Germany, despite their economic clout.
"When there are rules, they must be applied correctly and equally
to all, to big countries and little countries," said Monti. "If
the objective conditions are there...sanctions will be triggered."
Such threats have not fazed French Prime Minister Jean-Pierre Raffarin,
who this week announced a three percent cut in income tax for 2004 and
has repeatedly insisted that promoting growth was his priority.
The need for growth was emphasised anew by Budget Minister Alain Lambert,
who told LCI television last week that France would urge Brussels not
to rush to judgement.
"Germany is already in recession, as is the Netherlands and Portugal.
The last thing we need is France to join them," he said. "France
is perceiving signs of a pick-up. We must encourage this recovery."
But the Commission insists that ramping up deficits is not the way to
help growth, and is being backed up by the European Central Bank - who
expressed concern about fiscal developments as recently as Thursday
of last week.
"Sound public finances and sustainable public finances are conducive
not only to price stability but also to long-term growth," ECB
Vice President Lucas Papademos said on Thursday.
Even France agrees with this view on a longer-term horizon. "Our
aim is to control and master our public deficit," said Mer, acknowledging
that France's deficit was "too high to be sustained in the long