Brussels, 25/09/2002 (Agence Europe) - The Commission's suggestion of postponing the deadline for budgetary balance to 2004 or 2006 at the very most, was debated by the College of Commissioners on Tuesday. It was welcomed by France and Italy but could divide Member States during the next EUROGROUP meeting on 6 October and at the ECOFIN Council on 7 October in Luxembourg (see EUROPE yesterday p 7). Countries like Spain, the Netherlands and Finland support the need for strict budgetary discipline for assisting the Euro, whereas France and Italy requested at the beginning of the month a certain flexibility, arguing that additional spending could help launch growth.
The Belgian Minister for the Economy and Finance, Didier Reynders had already declared on Wednesday that the Stability and Growth Pact could be compromised if Germany, France and Italy did not manage to balance their budgets by next year. Mr Reynders stated on Belgian radio that, "If next year or in 2004, these budgets are off balance, it will not only be the Stability Pact that will be compromised but investor and consumer confidence in EU development".
Reaction from the Dutch Ministry of Finance was even more virulent. A Ministry spokesman declared, "We are highly critical and very unhappy - we think that this is in danger of becoming a moving target". The Netherlands, Spain, Belgium, Austria and Finland had gone flat out to balance their budgets for 2004, he concluded.
Italy has demonstrated that it fully agrees with the Commission proposal and explained in a Treasury press release that this announcement, "confirmed the validity and efficacy of the Pact, particularly in the current period of international economic slowdown". The French Prime Minister, Jean-Pierre Raffarin declared that this was "good news" for his country. Germany chose not to make any comments on the subject of this initiative, pointing out that it had not been involved in the debate on the objectives report.
During the Council of Barcelona, the "four bad pupils" concerning the deficit in the Euro-zone were Portugal, Germany, France and Italy, who made a commitment to achieve a situation that was close to balance by 2004 (2003 for Italy). This promise turned out to be very difficult to keep, even more so given that the economic recovery that began in the first quarter of 2002 fizzled out and was transformed into growth that is far from strong.
Submitting this proposal to his counterparts, Commissioner Pedro Solbes for the first time acknowledged that the deadline of 2004 was not realistic. The Commission does not want, however, to be accused of being lax when it comes to the application of the Stability and Growth Pact. While making concessions on the deadline, Mr Solbes clearly pointed out that the rule on a GDP 3% ceiling on the deficit remained the key to the EMU vaults. The two year deadline extension granted to Member States so that they can get to a situation that is close to balance, must, according to Mr Solbes, be accompanied by assurances from governments that they continue to make regular efforts to keep their public spending in good shape. In this perspective, the Commissioner wants to see Member States committed to reducing their structural deficits (exclusive of conjunctural effects) by at least half a point of GDP (o.5%) every year. This proportion should be greater in countries where the deficit or debt is particularly high. This rhythm of growth is expected to speed up insofar as economic growth picks up strength, he added.
On Tuesday, the President of the Commission, Romano Prodi described the budgetary situation as "particularly sensitive" in four Euro-zone countries: France, Germany, Italy and Portugal and made a report on the 2004 deadline necessary. Speaking in a backdrop to the EU-Asia Summit in Copenhagen, the President underlined that these four countries had failed to consolidate their finances during periods of strong expansion. As a result, Mr Prodi thought that a return to balance before 2004 appeared unlikely but that the objective had to be reached by 2006 at the latest, whatever happens.
Spain considered that the question of the report on budgetary balance should have first been debated by Finance Ministers and Heads of State and Government. The Minister of Finance, Cristobal Montoro stated that, "The Spanish government would have preferred that this was the result of a proposal, of a debate, at the European Council itself and therefore preceded by debates in the framework of ECOFIN…That's to day (we would have preferred that) and that it were not born out of a Commission proposal but is the subject of a debate".
Commission re-asserts pre-eminence of Stability Pact
On Wednesday the spokesman for the European Union repeated that the Stability and Growth Pact linking the countries of the Euro-zone remained the building block for the good economic health of the European Union. Jonathan Faull, the spokesman, explained that the Stability Pact had served Europe very well. He declared that what had been obtained by way of the Stability Pact represented a great success. He also noted that the suggestion to postpone the date for returning to a balance in the public deficit by 2006 at the latest, "aimed to take into account European economic realities" and would ultimately "strengthen the implementation of the Pact". Mr Faull observed that the objective of a return to financial balance in public finances still remained, although the Commission now accepted considering "cyclical consideration", namely the economic fundamentals in place, he added.
Gerassimos Thomas, the spokesman for Pedro Solbes, stressed that the extension period for economic balance being put back to 2006 was accompanied by a new obligation, that of reducing the structural deficit by 0.5% every year. All this would contribute to enabling Member States to avoid hiding behind the slowdown in economic growth for justifying their tardiness in reaching balance. Mr Thomas also added that the limit ought not to exceed 3% of GDP as foreseen in the Stability Pact but would increase in nominal terms, without taking into account the economic cycle. He concluded by stating that they would not accept other proposals or extensions, which would make the situation become "messy".
Quarterly report on Euro-zone insists on respect for the Pact - Growth less than 1%
In the most recent quarterly report on the economy in the Euro-zone, published on Wednesday, Mr Solbes particularly underlines the budgetary efforts needed to, "safeguard and reinforce the macro-economic foundations on which the sustainable success of the Euro rests". The Commissioner also explained that respect for the Pact would, "support the confidence of producers and consumers and re-establish the Euro-zone economy" while they are waiting for the economic recovery. The report also confirms that economic growth in the Euro-zone would not be more than 1% at the end of they year and forecast growth that would be between 0.3% - 0.6% in the third and fourth quarters.
Warning from CDU/CSU politicians: "blue letter" to Germany if necessary
A general outcry by CDU-CSU MEPs greeted the Commission proposal. Hans-Gert Pöttering, President of the EPP-ED group speaking in Strasbourg, warned that, "it should not be the first step in a revision of the Stability Pact. He exhorted the Commission to send Germany a "blue letter" reprimanding it for having exceeded the 3% ceiling. This was also requested by the Vice President of the CSU, Ingo Friedrich, who insisted that the letter to Germany "must come". Mr Pöttering demanded that the Minister of Finance, Hans Eichel should still (in the few days after the Bundestag elections) keep to the commitments he made before the elections. Karl von Wogau, also a CDU MEP, warned of the temptation of revising the definition of the budgetary deficit and of "therefore weakening the very heart of the Stability Pact" (Mr von Wogau accuses the Socialist group at the European Parliament wants to do exactly that). The former President of the Austrian group of the EPP-ED added his voice to the choir of protest, accusing the Commission of damaging the credibility of monetary union, although he admitted that the 2004 date as the deadline for budgetary balance does not actually figure in the Stability Pact itself (but the European Council came out in favour of this date barely six months ago, he added). The ÖVP MEP from Chancellor Schlüssel's party announced that the European Commission should provide an explanation fast to the European Parliament's Economic and Monetary Committee and be subject to "very strict observation". He backed up the Austrian Minister of Finance, Grässer (who is stepping down) who had spoken of a two-speed European Union.