EU Heavyweights Under Fire
January 21, 2003
The European Union is set to punish Germany for exceeding the three percent Gross Domestic Product (GDP) budget deficit limit, the cornerstone of the EU's Stability and Growth Pact. France is also due to get a warning letter at the Ecofin meeting of European Finance ministers in Brussels on Tuesday.
Ministers have approved without discussion the measures in which they hope to bring Germany back into line after months of promises from Berlin. The Ecofin decision will lead to an expected formal recommendation that will demand a reduction in Germany's budget deficit over four years.
Despite numerous warnings and brushes with EU enforced action, Berlin admitted last week that its budget deficit hit 3.7 percent in 2002. Accepting the decision without question, the German Finance Ministry pledged to reduce the debt in line with EU demands. One EU diplomat told the Financial Times: "I can't see any controversial discussion" of the German case.
Strict enforcement of demands
The demands on Germany are nothing new, but the force of the EU's action is a definite hardening of its stance towards Berlin. However, the EU is unlikely to push the Germans for more cuts than those they are already struggling with, given that the tough measures imposed on Germany so far have helped drive it close to recession - threatening the entire continent's economic recovery.
Germany was a strict advocate of the Stability and Growth Pact, the rules that underpin the single currency. Despite insisting on its stringent controls, Germany has been one of the main offenders in exceeding the GDP budget deficit limit. Under the Pact, countries signed up for the single currency must keep below the three percent limit or risk destabilizing the euro.
Under the rules, any member of the eurozone faces a discipline procedure if its budget deficit breaches the three percent limit of GDP, leading ultimately to heavy fines if corrective action is not taken. The EU has fought hard to keep the original rules in place despite calls from certain member states to relax the budget control limit. Unsurprisingly, it has mostly been countries in danger of breaking the Pact that have called for more leniency.
France to reach the limit in 2003
Another country feeling the pressure from Brussels on Tuesday will be France, one of the supporters of more relaxed limits. France looks set to receive a stinging rebuke for failing to keep its finances in check. The EU has been aware of the risk that France's deficit is in danger of breaching the three percent GDP limit and is now ready to formally deliver an official letter of warning to Paris officials. The French government has forecast a 2.6 percent deficit for this year with financial experts expecting it to be closer to 2.9 percent.
The finance ministers from the 12 eurozone countries are likely to take a tough line with Paris and demand that France reduces its deficit by 0.5 percentage points per year, hoping to bring its finances close to balance by 2006. France is expected to vote against the EU action or abstain.
Action should be linked to global economy, says Paris
The French, notorious for their refusal to accept specific deficit reduction targets, believe that any pledges to reduce the deficit would be hostage to the slowdown currently gripping the world economy. In their view the pact should be interpreted flexibly, taking into account global conditions. Francis Mer, the French finance minister, is expected to make a last-ditch attempt to water down the wording of the warning at Tuesday's meeting.
Both Germany and France, the eurozone's two biggest economies, are suffering from sluggish economies that are making it harder for them to meet budget pledges. Some EU ministers want strong words to be backed up with strong action to send a clear signal to Germany and France that they remain committed to the budget rules they accepted when they signed up to the Stability and Growth Pact.
Elsewhere on the Ecofin agenda, ministers will review the European Commission's recent assessment of Italian, Greek, Austrian, and Swedish medium-term budget plans. These need confirmation and backing from the EU finance ministers before they can be implemented in the countries.