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Tuesday, November 04, 2003

Killing the Stability Pact with Kindness?

There's an interesting tussle going on in Brussels at the moment, involving arguments which essetially involve long-term credibility. Short term this may find a not-too-difficult 'compromise' solution, but long-term I think it is an indication of problems to come:

Germany and France were on Monday accused of trying to "kill" Europe's fiscal rules, as EU finance ministers met amid mounting political tension in the 12-country eurozone.They claim to have found a legal loophole that might allow them to escape the threat of sanctions under the EU's stability and growth pact. But their manoeuvre has enraged the European Commission and some smaller countries, which claim it would destroy the pact's already weakened credibility.

Karl-Heinz Grasser, Austrian finance minister, urged his EU colleagues to stand up to pressure from France and Germany, the eurozone's two most powerful economies.Speaking ahead of Monday night's eurogroup meeting of 12 single currency finance ministers, Mr Grasser said both countries must face the consequences of breaching the pact's deficit rules for three years in a row. "We all are obliged for our own credibility and the credibility of the euro to find a way out," he told Reuters news agency. "The way out cannot be by killing the stability pact and putting one pillar of our monetary union at stake."

The 12 members of the single currency are at the point where they must decide if they are serious about enforcing the pact, designed to enforce fiscal discipline across the eurozone.They must decide this month - either on Tuesday or more likely at their next meeting on November 25 - whether to support the European Commission's recommendation to start proceedings against France for its third breach of the pact in 2004.It is the first time the eurogroup ministers have reached this point. Once passed, Brussels assumes powers to direct Paris on how to correct its deficit, and will require Paris to submit progress reports; ultimately fines can be imposed if it fails to comply.

Germany, which will also breach the pact's 3 per cent deficit rule for a third time in 2004, is about to find itself in the same position as France.But rather than face the humiliation of having to submit to economic direction from Brussels, Germany and France are now trying to draw the stability pact's remaining teeth.The two countries, who believe they have support from Italy, Luxembourg and Portugal, want the Commission to suspend enforcement proceedings and adopt a voluntary approach instead.But the Commission insisted that such a step would be illegal under the EU treaty, and that it would not agree to such a retreat. "The Commission has done its job under the treaty, and now it is up to ministers to take up their responsibilities," said Pedro Solbes, EU monetary affairs commissioner.
Source: Financial Times

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