Talks Over Euro Stability Pact Postponed

After a number of calls for the relaxation of regulations on EU spending by those member states with spiralling budget deficits, the monitoring body of European financial ministers, Ecofin, has agreed to postpone discussions on the issue.

The new Ecofin president, Denmark's Thor Pederson, told the Reuters news agency that the EU states were in "good condition" and that reviews on the pact, pushed for by some European leaders, would be discussed at a later date.

The Ecofin chairman hinted at a postponement until after the German general election and said new discussions might resume early next year.

EU deficits must be lower than three percent of GDP

The EU Stability and Growth Pact demands that countries in the euro-zone must not run a deficit in their public budgets which is more than three per cent of their gross domestic product (GDP). If the countries do not live up to the pact, they risk paying penalties in the form of escalating fines.

The pact also demands that public debt cannot climb higher than 60 per cent of the GNP in euro-member states. In addition, the European Central Bank demands that annual inflation does not exceed 2 per cent.

Room for manoeuvre is very narrow and is causing problems in a number of euro-member states facing economic recession and rising unemployment, including Germany.

The world's third largest economy has faced two "blue letters" of warning in the past year as its deficit climbed dangerously close to the 3 percent level.

Germany recently admitted that it would miss its budget deficit targets for this year, but stressed the figure would remain within the boundaries for Europe's single currency. These comments followed speculation that this year's deficit could be as high as 3.7 per cent because of weak growth and high unemployment.

The prospect of breaching the three per cent ceiling has become a big issue in the campaign for this month's general elections, as the government and opposition have clashed over the state of the economy.

Others also continue to face growing difficulties in living up to the demands of the pact, which entered into force in 1999 to support the strength and the confidence in the new single currency.

Italy, France in danger of breaking promises and Pact

In France and Italy, political leaders are facing growing problems living up to election promises without breaking the pact.

Italy wants the three per cent limit for deficit in the public budget to be raised to four per cent. Instead of shaping up the Italian economy, it seems the Berlusconi government is now just waiting for other euro states to call for changes in the Pact.

Italy's public deficit has increased drastically in the first eight months of the year, increasing by about 3 billion euros in August alone. This deficit rise is casting doubt on the economic reform programme of Italy's ruling centre-right coalition.

These figures will come as a blow to the EU, as they risk jeopardising the stability and growth pact. It goes some way to explain why Italy is one of the more vocal states when it comes to amendments to the pact.

France narrowly escaped a warning in June. It scored a coup at the Seville Summit promising to bring its budget close to balance by 2004, but making this conditional on French economic growth which is set at an ambitious 3 per cent per year - a figure many see as very unrealistic. Now there are reports that France is running a deficit very close to the pact's 3 per cent threshold.

The new Portuguese government released figures in June that showed a much higher budget deficit (3.85 per cent) than the previous government reported.

The European Commission said that it was legally obliged to take action against Portugal at the time. Portugal, it transpires, may have run up a deficit of more than 3 per cent of output last year, in breach of the Maastricht Treaty, which the Pact was brought in to strengthen, and should technically be facing not just a warning but also a fine.

Those who comply oppose changes to regulations

Not all EU states are calling for changes in the Pact. Finland has insisted the rules should not be changed to help member states out of a budgetary hole by warning "it was essential to protect the stability pact" and that it would resist any attempt to loosen the rules that underpin the euro, according to Financial Times.

Speaking to the Financial Times, Sauli Niinistö, Finland's finance minister, said he was aware of pressure to relax the pact as Italy, France, Germany and Portugal all struggled with their deficits. "In this situation, it is very essential to protect the stability pact," he said.

"Every now and then we encounter the view that the pact is too tight but it now seems that it has been too loose. It gives a lot of room for mistakes because you don't get punished by market swings."

Austria, Belgium, Denmark, Luxembourg, the Netherlands, Spain, Ireland and Sweden are also among those expected to oppose fundamental reforms to the pact, having already complied with the requirement to run a balanced budget.