ECONOMY

Greece must reduce debt fast, says EU

BRUSSELS – The European Commission’s revision of the Stability and Growth Pact will make it even harsher for highly indebted Greece to avoid fines, since the revised pact will extend sanctions. On the other hand, the Commission allows a certain leeway for those member states who have, so far, been especially vigilant in adhering to its targets. In this way, the Commission answers the criticism that the Pact is too rigid and stifles growth. The Commission will put an end to a four-year «grace period,» which finds at least half the members exceeding either the budget deficit target – which should not exceed 3 percent of a country’s gross domestic product (GDP) – or the debt target – which should be lower than 60 percent of GDP. Until now, the Commission has relied on the mild rebukes administered via its regularly updated euro area reports and, in the most blatant cases of excessive deficit, on announcing implementation of the pact’s automatic sanctions mechanism. In some cases, however, this announcement has been stiffly resisted by members, especially the larger ones, who have their own political priorities and who have humiliated the Commission by overturning its decisions at Ecofin sessions. Thus, on Wednesday, Commission President Romano Prodi – who had called the Stability Pact «stupid» – and Finance Commissioner Pedro Solbes presented a proposal to revive the pact. This proposal, in fact, makes the oversight of member states’ economies much tighter, while allowing some leeway for good behavior, that is, a drastically reduced debt level. The revised Stability Pact introduces a new «crime,» fiscal laxity at a time of prosperity, arguing that it multiplies the negative effects of any subsequent economic slowdown. It also makes the total debt, not the annual budget deficit, the main criterion of adherence to the Stability Pact. Greece’s debt, at the end of 2002, will stand at 105.1 percent of GDP. The Commission singles out Greece and Italy as countries with a high debt level that have made little progress in lowering it over the past four years. As a result, they are asked to implement an «ambitious long-term strategy» to reduce debt. In case they fail to do so at a «satisfactory pace,» defined by Solbes as an average annual reduction by 4 percent of GDP, tight timelines and fines will be imposed.