The President of the Economics and Finance Council (and also of Eurogroup) Jean-Claude Juncker, has a very clear vision of the changes to be made to the application of the Stability and Growth Pact, which broadly match the ideas of European Commissioner for Economic and Financial Affairs, Joaquin Almunia. This clarity is the first precondition for success because although there are still divisions between some Member States on the issue, it is becoming impossible to proceed without a degree of plain speaking and clearly expressed ideas. The fact that Jean-Claude Juncker is now going to be chairing both the ECOFIN Council meetings and the two Eurogroup meetings in the run-up to the Spring Summit, and then the actual Summit itself, removes any risk of rather artificial misunderstanding between economics and finance ministers on the one hand and heads of state on the other. The official views (expressed before the European Parliament) and interviews and statements by the chair of many meetings, Jean-Claude Juncker, confirm a number of areas which were already well-known, explain others in detail and introduce new ideas. From all the above sources, the key elements of his vision are as follows:
1) Leaving the text unchanged. The text of the Stability and Growth Pact itself will not be amended, which clearly means that the 3% GDP upper limit for GDP budget deficit and the 60% GDP upper limit for overall public debt also remain in place. The objective is not to 'reform' the Pact but to adjust its application measures because Juncker says it is clear that changes have to be made. Juncker stressed several times that the full importance debt criterion has to be taken into account and 'rediscovered in all its amplitude' because it certainly makes a difference whether the level is 106% of GDP or 4% (the current range).
2) No type of spending should be automatically subtracted from the deficit. Juncker has said he is 'allergic' to the idea of excluding whole tranches of state spending, saying this would be unrealistic because the money is still coming from the public purse and this would open the door to abuse and constant bickering about how to accurately separate off research or infrastructure or military spending, for example. One country would want to exclude research, another infrastructure investment, another defence spending, yet another net contributions to the EU budget… The Pact's rules would end up only applying to administrative spending (see my column of 24 November 2004).
3) Taking account of the economic situation. The idea here is well-known: if the economy is doing well, states have to be forced to cut debt and deficits. But in times of lengthy slow-down, the Pact should not be applied so strictly or automatically. In order for the Pact to take better account of the economic cycle, Juncker has announced different assessment criteria. In terms of strong economic growth, Member States in the eurozone will have to use budget surpluses for cutting debt and deficits. In times of slow economic growth, Member States will be able to use the budget to react and will have greater room for manoeuvre in proportion to the deficit and debt reductions made in good years. The assessment criteria should be neutral and objective to avoid at all cost arbitrary political judgements that run the risk of leading to different assessments for big and small Member States. Logically, the overall debt level must also be taken into account (see point 1).
4) Type and quality of spending should be taken into account. It is foreseen that the type and quality of spending should be taken into account. As far as I know, Juncker has not given much detail about this, hinting that deficit assessments could be 'more flexible' if overstepping the 3% threshold results from the cost of reforms (leading to future savings), investment in infrastructure or high net contributions to the EU budget (which Germany is calling for). The assessment criteria have been under discussion at the Commission and by national experts ahead of this Tuesday's ECOFIN Council and Eurogroup meeting.
5) Other areas of flexibility. Juncker opposes in principle any weakening of the Stability and Growth Pact that risks making the euro less stable. Potential elements of flexibility must be properly justified and not lead to sloppy application of the Pact. A level of elasticity could be introduced in terms of deadlines for bringing the deficit back below 3% and 'exceptional circumstances' could be defined justifying exceeding the upper limit. The definition is currently very strict (huge recession with GDP falling 2%) and some Member States want this to be extended to include periods of prolonged stagnation, but others oppose the idea and the European Central Bank argues for a strict approach. As far as I know, Juncker has not given any details, probably because he hopes the experts will find a compromise solution.
Reasonable optimism and positive elements. Several elements explain and justify the multi-hatted President's reasonable optimism about the chances of reaching agreement at the Spring Summit. Firstly, the broad convergence of opinion with the European Commission. Almunia's proposal basically follows the same lines and Juncker reaffirmed again last week that he greatly supports the Community Method and no Council Presidency could ever get results without adopting a common approach to problems with the European Commission. It is not Juncker who will give the ECOFIN Council an intergovernmental tone (the way some finance ministers were tempted to do when the Commission applied to the Court of Justice over the way the Council managed the Stability Pact). The second positive element is that debate has already been held between ministers both at the informal meeting in the Netherlands last September and in formal ECOFIN Council meetings and November's Eurogroup meeting. Divisions still exist, of course, between the different ministers (see Europe of 17 November, p.14), but the Commission's text was seen as a 'good working basis' and broad consensus has emerged over various important aspects.
A few disruptive elements. It is true that a few disruptive factors have muddied the water, like 'errors' in budget statistics reported by Greece in the past; Chancellor Schroder's insistence that net contributions to the EU budget be excluded from deficit calculations; and Silvio Berlusconi's insistence at the December 2004 Summit that the deficit criteria should be interpreted with flexibility, particularly the debt criterion. On Greece, Juncker has acknowledged that if the affair had come to light two years earlier, it would have had an impact on the euro's credibility and exchange rate, but the euro is now so solid that concerns tend to focus on it being too strong. On Germany's demand, it is clearly out of the question that Juncker would agree to payments to the EU budget being excluded from calculations, but these payments might be taken into account in assessing the size of the deficit (see point 3). Berlusconi was able to make his declaration to colleagues, but they did not pay too much attention because minds were taken up with other priority issues. The Italian prime minister is arguing that the Stability Pact is holding growth back and has to be amended. After this, Almunia said that these statements had absolutely no impact in the working on changes to how the Pact operates. Berlusconi replied that the European Commissioner was in contact with finance ministers, and they take the most restrictive views, whereas Berlusconi himself had discussed the matter with Chancellor Schroder, President Chirac and Prime Minster Tony Blair. According to sources in Germany and France, these discussions were rather general and never included minimising the importance of the debt criterion. At first sight, Berlusconi has overlooked the fact hat the work of the EU's finance ministers (on the ECOFIN Council and the Eurogroup) is chaired by the same Jean-Claude Juncker who will be chairing the Spring Summit.
Towards balanced management of EMU. The stability of the euro is vital, and to quote Jean-Claude Juncker again (from a speech he made last week to the European Parliament): 'Stability is part of the founding pact the euro is based upon. We promised a stable currency. It will remain stable, it will remain strong.' The functioning of the Stability Pact can be made more intelligent, of course, and the responsible authorities are in the process of doing this. It is possible, even, that the ECB's monetary policy could be partly modified (I myself couldn't come up with this - see the exchange of views between the President of the European Central Bank, Jean-Claude Trichet, and MEPs as reported in this newsletter on 23 September 2004, p.14). Moreover, and more importantly, the work of our multi-hatted President, with the 'permanent dialogue' he is setting up with the ECB, prefigures economic governance of the European Union which would allow balanced management of Economic and Monetary Union. But let us hold our horses at this point. For the moment, the priority is adjusting the Stability and Growth Pact.
(FR)