17 November 2004

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German, French bid for looser EU pact hits resistance

Finance ministers from Germany, France and Italy pushed for loosening Europe's deficit rules, clashing with smaller countries and the European Central Bank over how to boost Europe's economy.
Finance chiefs from the three largest of the 12 countries using the euro endorsed proposals to build more flexibility into the accord limiting deficits, which was suspended last year when Germany and France bucked calls for spending cuts.
Resistance to the proposed changes in the stability pact came from the central bank and countries including Spain, Austria, the Netherlands and Finland, deepening the European split over how to boost an economy dogged by weak consumer spending and an appreciating currency.
“The pact isn't the problem, but the lack of political will to implement the existing rules,” Austrian Finance Minister Karl Heinz Grasser said at a meeting of European finance ministers yesterday in Brussels.
European economic growth will trail behind the US through 2006, marking 13 years in a 14-year stretch in which Europe performed more poorly than the US, the European Commission forecasts. Third-quarter growth in the euro region's gross domestic product slowed to 0.3 percent from the previous three months, when it grew 0.5 percent, the European Union's statistics office said Nov. 12.
With Germany, France and Italy set to reach or overstep the deficit limit of three per cent of gross domestic product in 2004 and 2005, central bankers say proposals to widen public spending leeway would dent investors' confidence in the economy.
French Finance Minister Nicolas Sarkozy urged relaxing the rules by keeping research and development investment out of the deficit calculations, a stance endorsed by Italy.
“We must treat this spending in a particular way and keep it out of the deficit,” Sarkozy said. “The reform of the pact is aimed at boosting growth. This requires more European investment in research.”
Germany, the largest contributor to the European Union's 100 billion-euro annual budget, is calling for a revision to national deficit calculations to exclude payments into the EU coffers.
“A majority agrees that we should not exclude specific expenditure categories from judging the deficit,” the chairman of the meeting, Dutch Finance Minister Gerrit Zalm, told a news conference.
Monetary Commissioner Joaquin Almunia said he will assess German and French budget figures in coming weeks to decide whether to reopen the probe of the two countries' budgets that was suspended last year.
ECB President Jean-Claude Trichet, who sat in on the ministers' first session last night, has said an easing of the rules would undermine the euro and called on governments to tighten their belts during periods of economic growth.
The clash between central bankers and political leaders such as Germany's Gerhard Schroeder and France's Jacques Chirac is a test for the almost six-year-old euro, a currency intended to turn Europe into an economic superpower that rivals the US
“There are distinct positions at the moment,” said Economy Minister Pedro Solbes of Spain, which has run lower deficits than Germany, France and Italy since 2001. Solbes opposed widening the range of “exceptional circumstances” that would permit countries to run excessive deficits.
EU finance ministers need unanimity to overhaul the stability pact, which was designed by Germany. Central bankers have no vote on the proposals, which the ministers plan to complete in 2005.
Austria's Grasser opposed exempting research, military, education or infrastructure spending from the deficit calculations, saying this “would spell the end of a serious, solid fiscal policy. Spending is spending.”
Backers of the fiscal rules pointed out that most governments are pledging to do more during times of economic growth to cut spending, to avoid falling into a deficit trap when the economy slows.
The ministers affirmed 3 percent as the limit, saying any country that goes over that mark would automatically face stricter monitoring of its public finances in what the EU calls an “excessive-deficit procedure.”
In addition, Zalm reported a “broad” consensus - opposed primarily by Italy - to give countries with lower debt more leeway to run deficits. Italy's debt, at 106 percent of GDP, is the second-highest in the EU after Greece.
“There is broad support that if a country has low debt and sustainable finances, that such a country could have less ambitious medium-term finances,” Zalm said. As for high-debt countries, “logic says that they should be more ambitious than average.”
Separately, Greek Finance Minister George Alogoskoufis pledged to bring the 2005 deficit below the cap after revisions showed Greece was out of compliance every year since 1997.
Alogoskoufis said Greece didn't fudge its statistics to enter the euro because prevailing EU accounting methods put the deficit at less than 3 percent in 1999, the test year for Greece's euro entry.
“There is no question mark about Greece's entry into economic and monetary union,” Alogoskoufis said.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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