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Thu, Jul 15, 2004 - Page 12 News List

Brussels' leniency toward France, Germany criticized

FISCAL DISCIPLINE The Court of Justice said that the EU finance ministers' decision to give the two countries more time to reduce their budget deficits had been in error

NY TIMES NEWS SERVICE , FRANKFURT

Europe's highest court ruled on Tuesday that Germany and France should not have been allowed to flout the fiscal rules that underpin the shared euro currency, even as a growing number of Europeans are questioning whether those rules make much sense.

The Court of Justice in Luxembourg said the finance ministers of the EU's member nations erred in November when they voted to give Germany and France more time to reduce their budget deficits, which were larger than the rules allowed.

The ministers acted after the European Commission, the union's executive body, had recommended tougher treatment of the two countries, including the possibility of fines.

Though the decision was a victory for Brussels in its perennial power struggle with Europe's national capitals, it does little to resolve the larger question of how to enforce fiscal discipline among the 12 countries that now use the euro.

Few experts say they expect the French or German governments to face sanctions any time soon.

Indeed, French and Germans officials praised the court's judgment on Tuesday, noting that it had found fault with the way the ministers had handled the matter rather than the substance of the outcome.

With France and Germany in clear violation of the fiscal rules, and four others -- Italy, Greece, Portugal and the Netherlands -- in danger of joining them, the agreement underpinning the euro, known as the Stability and Growth Pact, has long since lost its teeth.

"It's clear that this is a political process," said Joerg Kraemer, the chief strategist at Invesco, an asset management firm in Frankfurt. "People in the market know that the stability pact is, de facto, dead."

A debate over how to reform the rules is gathering steam in Europe, with some critics calling for much of the pact to be discarded, while others say it should be kept but applied more selectively.

The European Central Bank said in a statement that there was no need for any changes in the pact.

In the end, officials and outside experts predicted, the European Commission will probably retain the rules but water them down significantly, responding to critics who say they impose overly strict limits on national budgets that fail to allow for the ups and downs of the economic cycle. That prospect would cheer officials in France and Germany, who claimed last year they could not embark on stringent cost-cutting at a time when their econo-mies were limping out of recession.

France flatly refused the commission's demand that it bring its deficit below 3 percent of its GDP, the ceiling stipulated in the Maastricht Treaty that created the monetary union. Germany, though less defiant, also failed to bring its deficit into compliance.

German Finance Minister Hans Eichel said the ruling by the court was "very wise."

"Finance ministers are, and remain, the masters of the excessive deficit procedure," he told the Deutsche Press Agency.

Eichel's French counterpart, Nicolas Sarkozy, praised the court's insistence on proper procedure in Brussels. The decision "reminds us that common European discipline must be scrupulously respected by everyone," Sarkozy said, adding that he could be counted on to rein in spending in an effort to reduce his country's deficit.

Even at the commission, which brought the lawsuit against the finance ministers in January, the talk on Tuesday was of finding common ground. The incoming president, Jose Manuel Durao Barroso, the prime minister of Portugal, said he hoped to "make the pact more credible without rewriting it."

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