Ec Declines To Draw Line On Emu Deficit Rules

The Commission decision offers a foretaste of difficult negotiations ahead over the terms of the German-backed stability pact for enforcing fiscal discipline in the planned economic and monetary union.

All European Union members back the principle of a stability pact, but most are shying away from calls by Germany for a restrictive interpretation of the temporary and exceptional circumstances under which countries could run deficits in excess of the Maastricht target of 3 per cent of gross domestic product.

The sentiment in favour of flexibility surfaced in Brussels when the 20 European commissioners held their first full debate on how best to enforce currency and budgetary discipline after the launch of the single currency, planned for January 1 1999.

 

Commissioners supported proposals for heavy fines against countries that failed to control deficits after joining the single currency

But a clear majority spoke against efforts to narrow down temporary and exceptional circumstances under which countries could escape sanctions.

As a result, Jacques Santer, Commission president, and Yves-Thibault de Silguy, monetary affairs commissioner, had to withdraw their proposal to quantify a recession as a drop of 1.5 per cent of GDP - close to the German proposal of 2 per cent.

Santer warned his colleagues of possible adverse German reaction, according to an observer.

But other commissioners argued for a less rigid approach to take into account national circumstances and the right of national parliaments to set budgetary policy. The Commission proposed an initial fine of 0.2 per cent of GDP for Emu members running excessive deficits, with an additional 0.1 per cent of GDP for every percentage point by which a countrys deficit exceeds the target of 3 per cent of GDP.

Brussels fashions Emu stability stick

Prevention is the aim to deter lax budgeting, but sanctions are less than Germany hoped for

Germany is discovering that there are limits to its power to set the terms of economic and monetary union.

This is the chief lesson to emerge from the European Commissions first full debate Wednesday on the rules governing currency and budgetary discipline in the post-Emu world.

The Commission discussion highlighted the political tensions in the Emu project, notably over German demands for a Stability Pact to guarantee fiscal discipline among countries participating inside the future single currency zone, and the extent to which national parliaments should enjoy some leeway in setting budgetary policy.

Theo Waigel, Germanys finance minister, called for a Stability Pact last year as a means of ensuring that the euro, the future single currency, should remain as strong as the deutschemark.

His idea was to use the threat of automatic draconian fines to ensure sound public finances among Emu participants, while simultaneously restricting countries leeway for loosening the fiscal straitjacket once they enter Emu.

The principle of a tough Stability Pact was endorsed at a meeting of EU finance ministers in Dublin last month which also agreed on the outline of a new exchange rate mechanism (ERM2) for countries not taking part in the future euro zone.