Wed, Apr 07, 2004 - Page 9 News List

EU facing uphill battle to put its fiscal house in order

With voters unwilling to accept much-needed reforms in the social welfare and labor sectors, deficits in the eurozone look set to soar

By Mark Milner  /  THE GUARDIAN , LONDON

As the EU prepares to open its new extension it might care to look at the cracks in the front wall.

Countries across the eurozone are struggling with their public finances, high unemployment and voters unwilling to accept painful structural reforms of their social welfare networks and labor markets designed to make their economies more flexible.

Take France. Last month, French President Jacques Chirac was forced to reshuffle his Cabinet after voters gave his party a bloody nose at the polls because they disliked the Raffarin government's reform program.

The outcome of the vote was summed up by business newspaper Les Echos the morning after the elections: "Here we have a situation of a country that must reform and a public opinion which refuses to do so."

Chirac's decision to keep Raffarin as prime minister and bring in Nicolas Sakorsy as his finance minister seems to have more to do with politics than with getting the reform program on track.

Raffarin will serve as a lightning conductor for further unpopularity while Sakorsy, the most dangerous challenger to Chirac on the right, has been given the job most likely to dent his electoral appeal.

The position is little better across the Rhine, although German Chancellor Gerhard Schroeder managed to get a watered-down version of his Agenda 2010 reform program on the statute books last year.

But as Deutsche Bank economists Norbert Walter and Ulrich Schroeder noted in a paper for the American Institute for Contemporary German Studies in the late autumn: "In view of the deep-seated weakness in growth, the Agenda falls short of the mark.

Domestic growth

"Agenda 2010 will not bring the hoped-for and urgently needed boost to domestic growth along with a strong revival of the economy by 2004. For the time being, Germany will continue to trail in the wake of the world economy," they said.

Add the fact that Schroeder had to threaten to resign to get his program through, and it is clear there is unlikely to be much appetite for further reform.

This shortfall could have serious consequences. France and Germany have been busting the rules of the stability and growth pact.

Critics have argued that deficit busting -- and lower interest rates -- is no substitute for the sort of serious structural economic reform that voters find so unpalatable.

The new Spanish government may be causing a few flutterings in both Frankfurt and Brussels, even though Pedro Solbes, the European Commission's monetary affairs commissioner and a respected former Spanish finance minister, is to return to his old job in Madrid. Just after the election, a senior Socialist party official indicated that the budget discipline projected by the departing Popular party might be heading for the waste bin under the new regime.

Instead of a balanced budget this year and small surpluses in the following two, as Spain should be creating under the terms of the stability and growth pact, the Socialist party's political secretary hinted that in the first couple of years the Socialists would be prepared to see Spain's finances go back into the red.

Budget busting

If that were not bad enough, Dutch Finance Minister Gerrit Zalm -- who has been one of the strongest critics of those countries that have failed to keep their deficits below the 3 percent laid down by the pact -- had to admit that the Netherlands, too, had fallen victim to budget busting. Although Holland is promising to be good this year, its moral authority in urging others to set their fiscal houses in order has been undermined.

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