Minister clinch deal on euro rule reform

EUOBSERVER / BRUSSELS – After months of complex and occasionally acrimonious debate, EU finance ministers have reached a deal on the reform of a key plank of the union’s economic policy.

An agreement was reached on how to reform the EU's infamous Stability and Growth Pact - the set of rules underpinning the euro – after 12 hours of emergency talks beginning on Sunday (20 March) afternoon.

Ministers will now draw up a report for EU leaders, who will rubber stamp the deal at a summit tomorrow (22 March).

But Jean-Claude Juncker, Luxembourg’s Prime Minister, who doubles as his country’s finance minister said that he had been in touch with other leaders and "did not expect a long discussion".

Expressing his "unbridled satisfaction" with the agreement, he said, "there will be no fierce controversy between heads of state and government".

The main sticking point during negotiations was a debate over what factors should be considered when deciding whether to punish a country in breach of the rules – as France and Germany have been for three consecutive years.

Broadly speaking, the rules state that no member state may run a budget deficit – tax receipts minus public spending – greater than three percent of gross domestic product (GDP).

Berlin insisted that the huge costs of Germany’s reunification should be considered, a claim that was initially dismissed by several ministers – including Mr Juncker himself.

And there was no mention of German reunification in the original draft proposal circulated to EU capitals late on Friday evening, infuriating the Germans.

A hastily re-written Presidency compromise text states that costs for the "unification of Europe" will be considered if a countries breaches the three percent ceiling, but only "if it has a detrimental effect on growth and the fiscal burden of a member state".

EU sources say that Berlin was insistent that a specific reference be made to the unification of Germany, but that this was dropped in the interests of finding a deal.

At their previous meeting, ministers were also divided over a list of "other relevant factors" to be taken into consideration if a country breached the three percent ceiling.

Smaller member states felt that there were too many exceptions on the list and bigger states – notably France and Germany – felt that there were too few.

Instead, member states may themselves submit "relevant" factors to which "due consideration" will be given by the Commission and the Council, according to the Presidency’s draft compromise – still to be finalised by EU leaders.

In addition to costs relating to the reunification of Europe, special consideration will also be given to "policies to foster R&D (research and development) and innovation", "financial contributions to fostering international solidarity" and the rather vague "achieving European policy goals".

The Pact has also been softened in terms of the amount of time a member state is allowed to correct its deficit problem.

Countries will now be allowed two years to correct their excessive deficits, rather than the single year currently permitted.

Furthermore, this deadline could be "revised and extended" if "unexpected adverse economic events with major unfavourable budgetary effects occur during the excessive deficit procedure", allowing a further two years.

And as the process requires one year to be initiated, the proposal means that member states could have five years to correct their deficit, which, as some diplomats were quick to point out, means that German Chancellor Gerhard Schröder will hear no more from Brussels about his country’s fiscal difficulties until after the next German election – due in Autumn 2006.

Furthermore, more leeway has been given to countries struggling with their deficits.

The new rules allow the three percent limit to be broken, but the deficit must remain "close to" the threshold and the breach must be "temporary".

New member states also secured one of their key demands that the cost of pension reforms are taken into account when assessing deficits. The Polish finance minister even hinted that this could help smooth his country’s path into the euro.

Italian finance minister Domenico Siniscalco said that the agreement was "an excellent European solution to a European problem".

Finnish finance minister Antii Kalliomaki, who said on his way into the meeting that "a small miracle" would be required, told reporters upon leaving, "a small miracle has happened. We found a common will".

The only finance minister not entirely happy was Austria’s Karl-Heinz Grasser, who has consistently argued that the Pact should not be loosened.

He told reporters, "It’s not the best solution I can imagine". But he welcomed the fact that the three percent deficit limit remains untouched.

The fudge has been institutionalised. The initial pact stated that neither budget deficits above 3% nor national debts larger than 60% of GDP were allowed.

Despite that Belgium and Italy both with debts larger than 100% of GDP were allowed membership in the euro.

Portugal, Ireland and Holland have been chastised for budget deficits, but when France and Germany have been running much higher deficits for much longer times they have been cleared.

Also, last sumer it was revealed that Greece had been fudging its budget and inflation figures to cheat its way into the Euro. The same happened in Italy, and also France, Germany, before the start of the euro.

So now this fudging has been enshrined in the new rules. The Italian minister was half right when he said:

"an excellent European solution to a European problem"

It is not excellent, but it is certainly European.

It is going to be interesting to see how long it will take before the markets start to understand that the euro is a scam.

Yep. I was wondering how long and in what form the solution to the problem of france's and Germany's violation of the deficit terms they themselves imposed on the pEU. I always suspected that the solution would be typically political: simply declare that it's not a problem afterall, and if it is a problem, take it to the "ministers" who will, after a suitable time lag re-declare that its not a problem afterall.

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