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Tue, Mar 22, 2005 - Page 12 News List

EU ministers reach deal to loosen stability pact


EU finance ministers cleared a major hurdle on Sunday in efforts to reform the rules underpinning the stability of the euro, meeting German and French demands for room to spend their way out of economic problems, officials said.

They reported a deal to ease the "Stability and Growth Pact," retaining the notion that annual budget deficits cannot exceed 3 percent of gross domestic product, but at the same time providing more leeway to legally exceed it in special circumstances.

The agreement ended five months of tortuous negotiations during which Germany and France led demands that the stability rules be interpreted less strictly by the European Commission to give governments space to stoke growth by increasing public spending.

A Dutch diplomat said Germany's partners rejected Berlin's long-standing demand its massive German unification payments be seen as a valid reason to violate the stability pact's austerity rules.

Germany already has spent some 1.5 trillion euros (close to US$2 trillion) on its post-Cold War reunification finance since 1990.

Room to overshoot

"But there is an agreement by the finance ministers to consider unspecified `European unification' costs as a credible reason to overshoot the 3 percent deficit target," said the official.

In that case a government may post a budget gap of 3.5 percent of GDP, but only "temporarily," the official said.

The ministers continued to debate demands by eastern EU members, which joined the EU last year, that their expensive efforts to build up pension funds will not be used to keep them out of the euro in future years.

Officials expected the issue to be resolved.

The reform of the euro rules were contained in a 19-page report, drafted by Luxembourg Premier Jean-Claude Juncker, whose country now holds the rotating EU presidency.

They aim to strengthen and clarify the euro rules' application by the European Commission.

Berlin, Paris, Rome and some other capitals have complained the commission has been heavy-handed and inflexible in that so far.

Five years to comply

Under Juncker's plan, countries exceeding the 3 percent budget norm may in the future invoke their own reasons why they should be allowed to violate the stability rules -- a move that points to a looser interpretation of a country's economic performance and outlook.

Any country exceeding the deficit limit may get up to five years to come back into compliance.

Germany is keen to cite its large contributions to the EU budget -- of which it pays 22 percent -- as a mitigating circumstance to miss the 3 percent deficit rule.

France wants to use its spending on research and defense as an excuse to break through that ceiling without getting notices from the European Commission.

It was expected the new stability rules -- replacing those written in the late 1990s -- will be endorsed by the 25 EU leaders, who are to open a two-day summit in Brussels today.

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