EU Supremo Undermines Key Deficit Rule

After years of defending the European Union’s budgetary regulations against member governments’ attempts to water them down, European Commission President Romano Prodi on Thursday gave critics of the EU’s Stability and Growth Pact fresh ammunition. "I know very well that the Stability Pact is stupid, like all rigid decisions," he told the French newspaper Le Monde.

Prodi’s remarks came after Germany, Europe’s largest economy, admitted its budget deficit would exceed the three percent margin intended to enforce fiscal responsibility across the eurozone. The pact’s credibility is at an all-time low. Portugal is also facing EU action for failing to limit its deficit and other member states are railing against the rigid guidelines.

One of those, France, is also close to the three percent deficit limit. Paris wants more budgetary leeway to counter sluggish economic growth. Finance Minister Francis Mer seized on Prodi’s comments. "The President of the Commission … himself declares and recognizes that the Stability and Growth Pact may need to show a little more flexibility and a little less simplicity," he told the French Senate. "I can only confirm what the President of the Commission said."

Who should manage the eurozone economies?

Thursday’s blunt talking pushes the ongoing debate about who should manage the eurozone economies into the public forum. Prodi believes the Commission should have the power to enforce economic cooperation within the single currency and is wary of relaxing budgetary discipline too far. "If the three percent limit on public deficits was not there, it would not be possible to avoid big overshoots," he told Le Monde. "The stability pact is a means of unity within the currency."

Many EU finance ministers, however, want more freedom of action to deal with economic conditions, not less. A special convention on Europe's future is already examining the options, but it is deeply divided on the issue.

German social democrat Klaus Hänsch, who leads the economics working group, is against any radical changes in the system, but a growing number of other members think it should be completely revamped – at the latest if or when Britain joins the eurozone.

The global chief economist at Lehman Brothers’ investment bank in London, John Llewellyn, notes that the main difficulty in enforcing the pact in the current economic climate was that the eurozone’s three main economies – Germany, France and Italy – had not wiped out their budget deficits before they were hit by an economic downturn. The EU last month extended the deadline for states to balance their budgets from 2004 to 2006.

Little chance of change soon

Plans to admit 10 new members into the EU are already sending tremors through European capitals, so there is little chance of a radical rethinking of the Stability Pact anytime soon. That leaves Commission officials with little choice but to play down the European Central Bank’s call for budgetary discipline and interpret the pact in a flexible manner.

"What would be stupid would be a rigid, dogmatic implementation which took no account of the realities of the situation," the Commission’s chief spokesman told Jonathan Faull said at a press briefing on Thursday. So, for the time being, Europe will have to live with the current system.

The conservative challenger in Germany’s recent general election, Bavarian State Premier Edmund Stoiber, told German television that Prodi had himself to blame if the system was "stupid" and had shown himself unfit for office by undermining trust in the Commission.

That is less Prodi's problem than that of the German and Portuguese finance ministers. It’s they who now have to explain to their long-suffering citizens that they are imposing austerity measures in compliance with EU regulations which the highest official in Brussels officially describes as "stupid".