European bank defends 'stupid' pact

  • 2002-10-31

The European Central Bank refuted last week criticism that a stability pact binding the 12 nations that use Europe's single currency was inflexible, defending it as indispensable for monetary union.

The ECB said in a statement that countries which are having problems respecting the 1997 Stability and Growth Pact, which sets a limit of 3 percent on public deficits, are the ones to blame, not the rules.

"Problems have arisen not because the rules are inflexible, but as a result of some countries' unwillingness to honor their commitment to respect the rules," the bank said.

The statement came after several countries, including euro-zone heavyweights France and Germany, showed signs they might breach the three-percent threshold, and argued for the pact to be applied with greater flexibility.

On Oct. 17, European Commission President Romano Prodi sent shockwaves through the European Union when he told the French newspaper Le Monde the pact was "stupid" and unduly rigid.

"I know well that the Stability Pact is stupid, just like all decisions that are rigid," Prodi said in an interview.

He also complained that the European Commission, the EU's executive arm, lacked the authority to implement the agreement with greater wisdom and flexibility.

But the ECB said that "contrary to the claims of its critics, the Stability and Growth Pact also provides sufficient flexibility after 'close to balance or in surplus' positions have been reached."

The bank urged countries with imbalances to commit themselves to a clear consolidation strategy.

"The results of fiscal policy in several countries are very disappointing," it commented in its statement.

The bank said that "the main reason why countries are in budgetary difficulties at present is because they have not used the situation of higher growth to substantially improve their fiscal position."

While it did not single out individual countries, the statement appeared to refer to Germany, France, Italy and Portugal, the four euro-zone nations with substantial budget deficits.