EU Stability Pact overhaul

BRUSSELS – The European Commission will today start work on overhauling EU budget rules so they are tougher in good economic times and more lenient in bad ones. But the work in progress won’t stop it issuing a barrage of budget reports, including policy recommendations to Greece and the six new European Union member states whose 2003 deficits broke the bloc’s cap of 3 percent of gross domestic product. This deficit cap, enshrined in the Stability and Growth Pact that underpins the euro, will be broken for the third year running in 2004 by Germany and France, as they failed to cut their deficits fast enough during the economic upswing. That lesson has been learnt at the EU executive, which is responsible for enforcing discipline across the 25-member EU. «We have to make an effort to apply the pact across the economic cycle. We have to be tougher when times are good but if we do that, we have more room to maneuver in weak economic times,» said an EU source. German Finance Minister Hans Eichel agreed that more account needed to be taken of the economic cycle. «It’s very difficult to change the text of the Stability and Growth Pact, but it’s necessary to make sure it is applied in a more economic fashion,» he told reporters in Berlin. «It was clearly a failure to focus on what happens at the bottom of the cycle. One has to reflect on what we do in much better times. This debate is going to come,» he added. European Economic and Monetary Affairs Commissioner Joaquin Almunia will present the budget reports at a news conference today. Change in the air The Commission has repeatedly said it wants to give more emphasis to countries’ debt position and the underlying budget position which excludes the impact of economic swings, and such ideas are likely to loom large in the debate today. Sources told Reuters earlier in June that the Commission was also considering using national institutes to help it police budget policies and offering temporary budget leeway to states that had wiped out deficits and had sustainable debt outlooks. The Commission might also consider redefining the sort of economic circumstances that act as a get-out clause in the Stability Pact – a change that would require a change in the pact’s regulations. Germany’s Suddeutsche Zeitung newspaper said Almunia wanted more pressure on EU states to reform job markets and welfare systems but more flexible deadlines for cutting deficits. While these and other suggestions will be aired this week, it is too soon to expect a concrete list of proposed changes. «(The commissioners) will discuss some ideas to try to move the debate ahead. It is not the time to confront member states with concrete proposals but the Commission will put forward ideas… and create a consensus,» the EU source said. Fights loom This debate could prove fractious, given past run-ins between proponents of greater flexibility, such as Germany and France, and supporters of strict budget discipline, such as the Netherlands. While members of the EU executive may not take up trenchant national positions, there is likely to be differences of opinion on strategy as legal and political complications enter the mix. The European Court of Justice has yet to deliver a verdict on whether EU finance ministers had the right to suspend budget disciplinary action against Berlin and Paris last year – a decision which is seen as critical for the pact. On the political side, the Commission will also need to decide whether it wants to forge ahead with changes to the pact as its term is due to run out at the end of October. «The Commission… will probably come out with an uncontroversial declaration on the need to reform the pact, as they are apparently waiting for the EU court decision before deciding if they should tackle issue before their term ends,» said one EU diplomat. The Commission will today also issue recommendations to Greece, Poland, the Czech Republic, Hungary, Cyprus, Malta, and Slovakia, all of which broke the EU deficit cap in 2003. The new EU entrants can expect leniency: «The approach adopted by the Commission is that in our recommendation to these member states we accept their timetable to eliminate excessive deficits,» the EU source said. Greece, a member of the eurozone, is likely to be given a more rigorous timetable to rein in its deficit.