Stability pact at risk of German death blow

  • 2003-06-21
  • Philippe Valat

Germany's deepening economic crisis risks dealing the final blow to the credibility of the European Union's Stability and Growth Pact.
The pact, which was designed at German behest to impose budgetary discipline on euro countries, is being undermined by slowdowns hurting the currency zone's biggest economies -- Germany, France and Italy.
The rot had already begun to set in by October last year, when European Commission President Romano Prodi infamously described the pact as "stupid" for enforcing belt-tightening at a time when governments want to open the spending taps to boost growth.
Prodi's comment undermined the work of his European Commission, which oversees the pact's implementation, and angered smaller member states that have battled hard to get their finances in order.
If, as expected, Germany once again breaches the pact's key stricture on budget deficits next year, questions over the future of the 1997 accord will reach a clamor.
At a meeting with Romano Prodi in Berlin last week, Chancellor Gerhard Schroeder said his government would "rediscuss" the pact if German growth fails to reach 2 percent in 2004.
Given that the euro zone's biggest economy is already in a recession, such growth seems unlikely.
Schroeder was seen as preparing the ground for Germany again to post a public deficit in breach of the stability pact limit -- 3 percent of GDP.
The pact foresees fines of up to 0.5 percent of GDP against countries that continually flout the deficit rule. In Germany's case, these could stretch to a colossal 10 billion euros.
Other EU governments have so far lent a tolerant ear to German explanations that it has been unable to stay under the deficit ceiling this year and last owing to lower-than-expected growth.
Failure by the EU to take action in 2004 if Germany breaches the ceiling for the third year running risks eroding the credibility of the stability pact for good.
The EU executive and the smaller states are likely to look askance at any more pleading from Germany for special treatment. But Berlin can count on heavyweight support from France and Italy, which are also struggling to meet the 3 percent deficit target.

The three countries, which together account for 70 percent of the euro zone's wealth, are putting up a united front by demanding that some of their spending, notably on defense, be stripped from deficit calculations.
Brussels has already rejected such an approach but is struggling to hold the tide against the demands of the big three. France has stubbornly resisted calls that it submit its budget to tighter oversight.
The Dutch government said that Germany and Portugal, another deficit breaker, had tightened their belts, and so it "cannot support different treatment in the case of France."
Italian Prime Minister Silvio Berlusconi, who assumes the EU presidency on July 1, has meanwhile called repeatedly for an "evolution" of the stability pact to make it more flexible.