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EU: Stability And Growth Pact Under Pressure From France and Germany

The European Union's Stability and Growth Pact looks set to face its next big crisis. France and Germany -- coping with worsening economies -- are unlikely this year to meet the pact's limits on deficit spending. The EU now has the unfortunate task of condoning the budget deficits or, eventually, having to levy fines on both countries. The fines would place an added burden on the two countries' economies, and -- by extension -- all of the eurozone. Prague, 28 August 2003 (RFE/RL) -- The European Commission appears to be headed for a showdown with its two biggest national economies, France and Germany.

French Prime Minister Jean-Pierre Raffarin yesterday hinted at what many had long suspected -- that France's budget deficit this year would exceed the EU's maximum limit for a third year in a row.

A news report in Germany this week says that country too will not be able to meet the EU's deficit target this year.

Under the European Union's Stability and Growth Pact, eurozone countries are not allowed to run up deficits in excess of 3 percent of the size of the economy as measured by gross domestic product (GDP). Countries that breach the rules three years in a row -- as France and Germany look set to -- face the threat of massive fines amounting to thousands of millions of euros.

Raffarin appeared on the defensive yesterday in a joint news conference in Brussels with European Commission head Romano Prodi, calling on the EU to enforce its rules "flexibly:"

"As far as France is concerned, we are fully aware of the advantage of being in the eurozone and we believe that budget discipline should be applied by all. However, it doesn't mean that we cannot have some sort of flexibility," Raffarin said

Raffarin said his primary job is to promote growth, not to hold down government spending. The French economy contracted in the second quarter of this year, putting the country -- like Germany, Italy, and the Netherlands -- on the verge of recession.

Raffarin's comments followed a 27 August article in the magazine "Der Spiegel" that Germany's deficit could reach 3.8 percent of GDP this year. The article did not give its source, but the finding was consistent with recent statements from officials -- including Chancellor Gerhard Schroeder -- also calling on Brussels to be flexible in enforcing the deficit restrictions.

Germany's inclusion as one of the main debtor countries is especially embarrassing since it was Germany in the first place that insisted on the relatively tight deficit standards.

But the German economy -- which depends heavily on exports of relatively expensive manufactured goods -- has suffered disproportionately in the recent global economic downturn. The country has been in or near recession for the past two years and the unemployment rate is in excess of 10 percent.

The Stability and Growth Pact was originally formed to protect the value of the common currency, the euro. It was feared the currency could be undermined if one or more governments within the eurozone were running up big deficits. It has come under criticism, however, as economic growth in the EU has slowed and governments have come under increasing pressure to run up deficits.

It's not clear yet how the European Union will respond if its two largest economies end up violating the stability pact.

Gerassimos Thomas, a deputy spokesman for the European Commission, says in any event the commission is not likely to levy a fine -- at least not right away.

"There is no question of fines at this stage, because if we have to do something right away, it would be to make more detailed recommendations to France. So, yes, the [president of the European Commission] said the commission must and will apply the treaty for the common good, but we need the full cooperation of the member states," Thomas said.

Thomas said the commission has already made a series of recommendations to France to lower its budget deficit. The country now has until 3 October to propose what it feels are appropriate measures. Only after that -- and another series of recommendations -- would France be in danger of receiving disciplinary action.

"France has to come up with the policies that they feel are appropriate in order to put an end to the excessive deficit procedure," Thomas said. "After the third of October the [European] Commission will have to evaluate whether the measures are enough and make a proposal to the 'Ecofin' council -- to the [member state] finance ministers. And if we feel that the measures are not enough to ensure that the excessive deficit will be corrected, then we will have to make a more detailed recommendation."

The commission clearly finds itself in a bind. This is the first time a country -- not to mention the two largest countries -- will have failed to meet the deficit guidelines for three years running. Observers say if the commission does not take some action, it risks losing credibility.

On the other hand, meting out enormous fines is simply not realistic. The fines would be difficult to enforce and if paid would only make France and Germany's economic problems worse.

Commission President Prodi was noncommittal in comments yesterday. He said the commission had no choice but to reflect the rules -- yet he added that it would be flexible in doing so. Prodi himself is known to be skeptical of the Stability and Growth Pact -- once famously referring to it as the "Stupidity Pact."