ECONOMY

A looser form of stability

BRUSSELS – The European Commission insisted yesterday that the EU’s Stability and Growth Pact on budget discipline was indispensable even as it set about changing it. Brussels suggested loosening some elements of the rules that underpin the euro to make them more growth-friendly, for example by redefining the circumstances under which countries that break its deficit cap might escape disciplinary action. It also wants to take account of economic developments when setting deadlines for budget cuts, giving more time to those hit by downturns, and tailor medium-term budget goals to individual circumstances rather than insisting on balanced budgets for all. But it balanced these ideas with calls for earlier action to head off poor budget policies and tighter monitoring of debt. It sought to assuage concerns that it was diluting the pact beyond recognition by repeating it had no intention of changing the pact’s deficit cap of 3 percent of gross domestic product, which has been repeatedly broken by Germany and France. The ideas were welcomed by Germany, which has led calls for a more flexible pact, as well as the Netherlands, a stickler for budget discipline, suggesting that the Commission could be on its way to building the consensus necessary for change. «It is my firm belief that these proposals will provide for a stronger and more credible pact,» Commission President Romano Prodi said in a statement. «The proposals present a credible compromise between economic soundness and political realism… between sustainable growth and sustainable public finances,» he later added. EU finance ministers will discuss whether the Commission has struck the right balance when they meet in the Netherlands on September 10-11. However, it could be 2005 before the EU’s 25 member states reach a final accord, the Netherlands warned. The Commission said a revamp of the Stability Pact was essential to restore credibility but some were skeptical. «I wonder whether this sort of short-term reaction to the current difficulties faced by some member states is what we need,» said Pervenche Beres, chairwoman of the European Parliament’s Economic and Monetary Affairs Committee. «It is not clear whether the proposed reforms could have any real chance of being applied,» she added. The Commission said it would try to apply the spirit of its ideas even before changes are finally agreed but only within the parameters of the current budget rules. It was unclear exactly what that meant for disciplinary action against Germany and France, which is currently in limbo. The EU’s highest court earlier this year overturned finance ministers’ decision to suspend such action, and the ball is in the Commission’s court. Brussels is still pondering its options, European Monetary Affairs Commissioner Joaquin Almunia said yesterday. «It’s for the Commission to decide if and when it opens (new disciplinary proceedings) and under what conditions,» German Finance Minister Hans Eichel told reporters in Berlin. «But certainly the Commission will make its assessment of those countries that are over 3 percent and in the deficit procedure against the background of its own ideas.» As part of the overhaul, the Commission wants to give more emphasis to debt and debt sustainability – a move which could be particularly relevant to Italy, the eurozone’s third-biggest economy and the one with the highest debt-to-GDP ratio. Countries with high debt positions should be set more ambitious budget targets, according to the Commission, which also wants to clarify the basis on which the pace at which a country is cutting its debt level should be assessed. There is currently no definition of what constitutes a satisfactory pace. Italian debt should hit 106 percent of GDP in 2004 and stay unchanged at that level in 2005, according to official Commission forecasts. Austrian Finance Minister Karl-Heinz Grasser said it would also be important to link the pact to the growth targets of the so-called Lisbon agenda which seeks to make the EU economy the most dynamic and competitive in the world by 2010. «The goal of the pact must be a growth-oriented financial policy as well as a stability-oriented one,» Grasser said in a statement.