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EU Mulling Legal Options after Suspension of Stability Pact

EU Monetary Affairs Commissioner Pedro Solbes said on Thursday that the European Commission was considering legal action to challenge the decision of EU finance ministers to effectively suspend the bloc’s deficit rules.

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Solbes has criticized the suspension of the EU's Stability Pact.

Led by the Germany and France, EU finance ministers on Tuesday opted to suspend the disciplinary procedures against those countries currently flouting the budget deficit rules of the European Union’s Growth and Stability Pact, which was designed to underpin the euro.

“The Commission’s legal department is studying the matter,” Solbes said in an interview published in the Thursday edition of the Spanish financial newspaper Expansion. “It’s something we have to analyze carefully. In my opinion, there must be grounds to go to the Court of Justice.”

Solbes has been highly critical of the suspension of the pact, which dictates that euro zone members are supposed to keep their budget deficits under three percent of gross domestic product or face possible sanction from the Commission.

Both Germany and France, the two largest euro zone economies, are set to breach the deficit limit for a third consecutive year in 2004. Berlin and Paris will now effectively avoid further disciplinary action as they try to spur growth via less restrictive fiscal policies.

Schröder defends decision

German Chancellor Gerhard Schröder on Wednesday said Berlin would continue to pursue budgetary consolidation, but defended putting the deficit rules on hold in order to promote euro zone growth. He said Germany needed to give priority to bringing forward planned tax cuts by one year to help get Europe’s largest economy back on track.

“We need consolidation without question,” Schröder said during a parliamentary debate on the 2004 budget. “But we need to stimulate growth. We have to pull these tax cuts forward to support growth.”

In Paris, French Finance Minister Francis Mer suggested the Stability Pact needed to be reworked. He said once the current storm over the suspension of the EU’s deficit rules subsided, the pact could be “improved” in 2005 when Europe’s economies were likely to have recovered.

Francis Mer

French Finance Minister Francis Mer

“During a crisis one shouldn’t raise the impression that you are breaking the thermometer because you are satisfied with the reading,” Mer told Europe 1 radio. “The temperature needs to drop again.” Mer’s German counterpart Hans Eichel, however, said on Wednesday that the pact did not need to be rewritten. In an interview with the German financial daily Handelsblatt, he said the pact had proven itself to be “an instrument for economically responsible fiscal policies.” He added, however that the decision to suspend the deficit rules was currently justified.

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