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Last Updated: Monday, 24 November, 2003, 16:41 GMT
EU mulls budget deficit sanctions
Euro banknotes
Some say the eurozone's Stability Pact is outdated
European finance ministers are meeting this week to decide whether to punish Germany and France over their ballooning budget deficits.

The two countries, which have struggled as economic growth stalled and tax revenues declined, have asked for more time to put their finances in order.

They are concerned that a cut in state spending would kill off any recovery, boost unemployment and alienate voters.

The European Commission, however, has reiterated calls for fiscal prudence.

Vote tomorrow

Ministers from the 12 countries sharing the euro will meet on Monday evening in Brussels, followed by an official gathering of all 15 European Union countries on Tuesday.

They will be asked to vote on Tuesday on whether to fine Germany and France for not controlling state spending, or allow them more time.

Under the Stability and Growth Pact, the 12 countries using the euro have to keep their annual budget deficits to less than 3% of gross domestic product (GDP).

German Finance Minister Hans Eichel
Germany's Eichel argues that cutting spending will snuff out a recovery

The agreement was brought in to help limit inflation and underpin the value of the currency when it was first introduced.

Germany and France now argue that the economic landscape has changed, requiring a more lax interpretation of the rules.

Recently called the "sick man of Europe" and the region's largest economy, Germany has rejected calls by the EU to cut its budget deficit by 0.8% next year and bring it down to 3% by 2005.

Finance Minister Hans Eichel last week dismissed the idea of sanctions saying Germany was doing all it could to cooperate.

Sanctions

France, meanwhile, seems to have taken a more conciliatory stance.

Without growth, you won't have stability
Roger Hornett, CEO Theodoor Gilissen Bankiers in London
The country last month escaped sanctions after officials admitted the deficit would not come within required limits for three years, but will be under 3% by 2005.

That still may not be enough for some Commission members, and while analysts and ministers said they were optimistic about a compromise it is far from a done deal.

Dutch Finance Minister Gerrit Zalm complained that the European Commission had not been tough enough with France and Germany, according to a newspaper interview on Monday.

European Central Bank President Jean-Claude Trichet, meanwhile, urged countries to honour their promises on spending.

Step back

Last week, Pedro Solbes, the economic and monetary affairs commissioner, said that the there was little room for political manoeuvring regarding the limits.

A motion will need to gain two-thirds or more of votes and Germany is hoping for support from allies such as France and Italy, analysts said.

Tuesday's meeting is likely to set smaller countries against the larger, they said.

Economists also raised concerns that failing to bring Germany and France into line would set a precedent for other members.

Italy and Portugal were recently singled out by the Commission as two countries who will also break their deficit limits unless they rein in state spending

"It's time for everyone to take a step back," said Roger Hornett, who advises on 5bn euros of assets as chief executive of Theodoor Gilissen Bankiers in London.

"I don't see what is so sacrosanct about a budget deficit of 3%. Without growth you won't have stability."

Growth recovery?

Slowing economic growth was exacerbated this year by the conflict in Iraq which dented both consumer and business confidence, delayed investment and prompted a slump in stock markets across the globe.

The Commission has cut its growth forecast for this year to 0.4% from a previous estimate of 1%.

Still, expansion is set to pick up in next year and that will help bring spending back under control and ultimately avoid a splintering of the Stability and Growth Pact, analysts said.

The Commission says annual economic growth will rise to 1.8% in 2004 and 2.3% in 2005.

A s a result, Germany's spending shortfall is estimated at 4.2% of GDP this year, dropping to 3.9% in 2004 and 3.6% in 2005, according to commission figures.

France's deficit is forecast at 4.2% this year, shrinking to 3.8% in 2004 and 3.6% in 2005.

"The faster growth means things will be moving in the right direction," said Theodoor Gilissen's Hornett.

"And that will allow everyone to save face."


SEE ALSO:
Solbes warns on EU budget fudge
19 Nov 03  |  Business
EU calls time on German budget
18 Nov 03  |  Business
Most countries 'flouting EU rules'
11 Sep 03  |  Business


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