Without giving rise to any enthusiasm, the solution settled upon by the ECOFIN Council to the problem of Germany's budget deficit is generally considered a wise compromise that keeps the most essential aspects, namely a) Germany's firm commitment to not break through the 3% GDP ceiling for its annual deficit and to stick to the other essential targets of the Stability Pact (rapid return to a balanced budget and gradual reduction of the overall public debt); b) recognition that the Commission's analysis was accurate and its initiative met the demands of the Stability Pact and the early warning procedure will be used every time the Commission's believes it would be appropriate.
Procedure or substance? Several fundamental aspects of European economic policy were under fire - the credibility of the Stability Pact and institutions' desire to apply it; the equality of large and small Member States when it comes to respecting common rules; confidence in the euro which is directly linked to tight budget policy. The EU came through this sensitive test in a broadly positive manner. In my view the spotlight falling on various shortcomings (I will mention them later) is also constructive. The President of the Council, Rodrigo Rato, said that procedures were a means to achieve an end. The early warning procedure launched by the Commission got Germany to make firm commitments. The target of close to balance budget in 2004 has been maintained (this might have to be extended to 2005 or 2006 if the economy does not pick up, but is no longer a target). All additional public finances (on top of those forecast) will be used to pay off the debt and a tight budget will also have to be implemented by the Länder. Central government will have to take action to ensure it is. Commissioner Pedro Solbes said these commitments met the Commission's concerns and seem pretty substantial, in fact.
Large and small. Some commentators have sarcastically commented that the first procedure launched under the Stability Pact led to a Council Recommendation because it targeted a small country (Ireland) whereas the procedure against Germany was deemed closed without any formal recommendation to the Council. Pedro Solbes denied there was a link between the Irish and German case. Dublin was following an economic policy felt to be incompatible with EU guidelines and a Recommendation was inevitable because Ireland did not want to change its policies; whereas Germany is following the right policy and the government has agreed to step it up, which means the objective was reached. But what about Portugal? - it was absolved along with Germany, commented one minister, but if it had been considered alone, it wouldn't have taken five minutes to agree to send a warning. Different treatment? We cannot be sure for the moment, but must remain vigilant.
Credibility of the Stability Pact and the euro. Credibility was saved, according to Mr Solbes, and even strengthened by this exploit, according to the President of the Council. Not everybody agrees. The spiritual father of the Pact, former German finance minister Theo Waigel, talked about a dodgy compromise; others have slammed the idea of compromise on rule that are supposed to be clear in themselves. Not to mention the MEPs in the CDU and CSU who let rip at the "catastrophic precedent" and "threat for the future of the euro" (see EUROPE of 13 February, p.10). As I said at the beginning, my impression is that the essential aspects have been saved. The Council unanimously recognised (with Germany's support) that the Commission acted in line with the Pact, which enabled the Commission to announce that that it will intervene every time a Member State strays too far from the budget targets it has itself set. The German authorities were no doubt already aware of this, but they were joined by political and financial milieus and public opinion in their awareness of the risks of the budget slipping in Germany and the need for tight policy. If what Mr Solbes said is true, that the early warning procedure was not a fetish and had to be judged by its outcome, the exploit was useful, as was the controversy surrounding it.
Shortcomings. The test Europe has come through has another advantage - it has shed full light on the failings of the Stability Pact and the urgent need for it to be complemented by two activities - co-ordinating economic policy and structural reforms. This is not a new discovery since discussions are in full swing on economic co-ordination and putting the Lisbon strategy into process is a priority for the European Commission and the Presidency of the EU Council of Ministers in the run-up to the Barcelona Summit. But it is always a good thing for politicians to be fully aware of urgent matters. (F.R.)