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Germany and France Push Growth over Stability Pact

France and Germany are pushing for a "flexible" interpretation of the EU stability pact, arguing that growth should take precedence over budgetary consolidation. The EU has begun to show understanding.

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Oh yes, Gerhard, we're breaking the pact as well.

Following one of their now-regular informal talks on Sunday evening, German Chancellor Gerhard Schröder and French President Jacques Chirac called for patience in the European Union regarding decision to flout EU budget deficit rules in order to help spark growth in the euro zone's two largest economies.

"The EU Commission and the partner countries in the EU must be interested in seeing the economy grow in Germany in France," Schröder told reporters outside Chirac's presidential office in Paris.

With the comments, Schröder and Chirac were once again taking aim at the EU Stability and Growth Pact. The agreement, designed to protect the value of the single currency the euro, calls for sanctions if a country's deficit exceeds three percent of its growth domestic product.

EU Monetary Commissioner Pedro Solbes told the French paper Le Monde that despite forecasts that France's deficit would reach 5 percent, he would not penalize the French government in 2004.

"To ask France to reduce its public deficit from four percent in 2003 to less than three percent in 2004 would be to demand an effort which would be difficult to justify from an economic point of view," Solbes said in the interview published Saturday.

Deficit largest in post-war history

During Sunday's remarks before the press, Chirac echoed those comments, adding that no one should "negate the recognizable first signs of an economic upswing." France was under pressure, both from fellow EU states angered at its ballooning deficit and Solbes, to take immediate action against the problem.

Solbes said he expects France to get its deficit under the three percent threshold in 2005.

Germany is arguing a similar line. Schröder asked for a "flexible interpretation" of the stability pact on Sunday, a day after his finance minister said new German borrowing could reach more than €40 billion this year.

The figure would surpass all of the predictions made by the German Finance Ministry in the past. A €40 billion euro deficit would be the biggest in postwar history and will likely ensure a stability pact violation of over four percent, more than the 3.8 percent has predicted by the ministry up until now. With only meager growth prospects for next year, the country could be on course to violate the pact for a third year in 2004.

Schröder said Sunday that he believes Brussels is beginning to understand the dilemma of the EU's two largest economies.

Like France, Germany is expecting almost zero growth this year. Though forecasts vary, all agree that Europe's largest economy will have to slash its growth forecast of 0.75 percent this year.

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