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Saturday, September 28, 2002


The decision to allow France, Germany and Italy until 2006 to comply with their balanced budget commitments has not please some of the EU smaller partners who have already made great efforts to comply. Of course each case is different, Italy, for example, appears to be making a standing joke of the whole process, while both France and Germany can muster case specific arguments in their favour. Additionally the condition of the world economy is arguably significantly different - much worse - from when the pact was originally agreed, and thus flexible, rather than 'letter of the law' interpretations are probably the order of the day. The bottom line, however, is that it is precisely this need for flexibility, and country specific measures according to contingency, that places the question mark over the Euro process itself. The stubborness of the ECB on the interest rates question places another. And in the end the good-order countries have a right to feel cheated, not to mention the consequences of all this where a Euro membership vote is looming.

Anger erupted across Europe yesterday over plans to allow France, Germany and Italy an extra two years to balance their budgets, in one of the most serious rows since the launch of the euro. Some smaller EU countries, which have already taken painful measures to eliminate their deficits, are upset over proposals to give the euro's three biggest economies until 2006 to do the same. They claimed the European Commission plan showed there was one rule for the big countries and another for the rest, and that it damaged the budgetary discipline underpinning the euro. Although markets have so far reacted calmly, many think the euro could be damaged if respect for the budgetary rules in the EU's stability and growth pact breaks down.

Yesterday France published its budget for 2003, with tax-cutting plans that clearly break its commitment to achieve a balanced budget in 2004. Italy's budget next Monday is also expected to signal a postponement in the target date for scrapping its deficit. Although both countries are suffering from sluggish growth, many EU members think Paris and Rome are flouting the stability pact by pushing through election pledges to cut taxes.
Source: Financial Times

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