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EU: Debate Over Stability And Growth Pact Will Affect Candidates

  • Breffni O'Rourke

A row is developing over the way the big European Union members France and Germany are set once again to break the terms of the EU's economic growth and stability pact. Smaller member countries are reportedly concerned at the way the big states appear to be flouting the pact with impunity. Is the pact now in fact dead? The question has important consequences for the candidate member countries of Central and Eastern Europe.

Prague, 17 July 2003 (RFE/RL) -- The European Union's growth and stability pact is again at the center of controversy, with the EU's two biggest members, France and Germany, signaling that they will breach the terms of the pact. For the third consecutive year, the two countries expect to exceed the deficit limits set down in the accord.

The pact is a measure designed to ensure that EU member states in the common currency euro-zone exercise prudence in their public-spending policies. It requires them to work toward balanced budgets and not to exceed a deficit in any one year of 3 percent of gross domestic product (GDP).

French President Jacques Chirac on 14 July called for a "temporary softening" of the stability pact, so that governments can react more flexibly in stimulating growth.

Chirac said it is not a question of abandoning the pact, but of the EU members getting together to see how they can work out ways of making the accord more flexible. Both France and Germany want to increase spending as a means of stimulating growth, but that will increase the size of their budget deficits.

Germany's Chancellor Gerhard Schroeder yesterday appeared to give strong backing to the French line, when he called Chirac's remarks "great and really very important."

Schroeder said the emphasis in the pact so far has been on "stability" -- in other words, on reining in excessive budget deficits -- rather than "growth." He suggested that now is the time to pay more attention to economic stimulation. Ironically, it was originally at Germany's insistence that the pact was formulated by the EU. Germany at that time wanted to see fiscal discipline imposed on chronic over-spenders like Italy.

London-based Deutsche Bank analyst Marco Annunziata told RFE/RL the fact that the leaders of the two biggest euro-zone economies are now thinking along the same lines spells trouble for the pact.

"When you have two of the major European countries which are on the brink of breaching the limits of the growth and stability pact for three years in a row, I think whether or not there is a formal weakening of the pact is almost irrelevant. It is clear that the pact is not working and not being adhered to," Annunziata said.

Annunziata characterized this as a negative development, in that whatever its failings might have been, the pact has been a useful instrument in imposing general fiscal discipline over the long term.

"The moment you recognize, or decide, that de facto and also formally the pact should not be obeyed when the economic situation is difficult, then [from that moment] the pact loses its hold, and that creates a lot more uncertainty about what the path of fiscal policy is going to be," he said.

Annunziata said he expects the European Commission to try to make the best of a bad situation by attempting to limit the damage. He predicts the commission will not declare the pact dead, but will try to repackage it as "moderately revised." It will try to persuade the markets that the spirit of the pact is being maintained.

A number of the other EU member states are reportedly annoyed at the way the big two are breaking the stability pact apparently with impunity.

In Tallinn, Estonian business journalist Anvar Samost said that also for the Eastern candidate countries the situation is "demoralizing." Ten of the candidates are on track to join the EU next year.

Samost, the head of business news at the Baltic News Service, said: "For the candidate countries, it has always been self-evident that to join the European Union and in the further future the European Monetary Union, they all have to follow the criteria, which have been set. And now if the largest countries will not fulfill those criteria, it will definitely be a very bad example."

Samost said, for instance, that among the Baltic states, Latvia has been the country which has usually been inclined to run the biggest deficits, and any slackening of the stability pact among EU members could tempt it to move further in that direction. And he said the EU-imposed criteria on budget control have been very useful for the candidate states in the past.

"Especially for the joining countries, it has been a good target. Without this target I think that many countries would have run quite high deficits, which they have not done now," Samost said.

Deutsche Bank analyst Annunziata agrees that the impact of continued fiscal impropriety in Western Europe could have serious implications for the East. He said: "That immediately opens the question of whether the criteria for entering the euro-zone should also be changed -- in other words, if Germany, France, and the whole of the EU agree that the growth and stability pact, as it was originally designed, should not be obeyed, that [raises] the question, should we be asking Poland and Hungary to meet the 3 percent deficit limit to enter into the euro-zone, or should that requirement also become more flexible?"

Annunziata said it's important for the accession countries that the uncertainty be resolved quickly. He said their preparations to join the euro-zone could be complicated unless they have clear criteria for joining the monetary union.

At least one unintended benefit from the stability pact row is that the value of the euro could drop. The euro has recently hit record highs against the U.S. dollar, and that has made exports from the euro-zone less price-competitive on overseas markets. European manufacturers would welcome any relief from that.