EU ready to fine budget offenders Germany and France

- at 7.6 per cent, Malta falls far short of convergence criteria

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 tax cuts.
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 EU’s 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, Malta’s 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 the EU.
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 term."