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Last Updated: Tuesday, 25 November, 2003, 21:07 GMT
Budget compromise attracts EU ire
EU economic and monetary affairs commissioner Pedro Solbes
Pedro Solbes said it was a political decision without legal basis
The European Commission has expressed anger that Germany and France have escaped punishment for their over-sized budget deficits.

Following an all-night meeting, eurozone finance ministers decided to let the two countries off the hook.

Germany and France argued that the cutbacks needed to bring their deficits in line with EU budget rules would harm Europe's fragile recovery.

The European Central Bank said the deal carried "serious dangers".

France and Germany escape disciplinary action
Both agree to cut deficits, but not by as much as the Commission wanted
The two will not have to make even those cuts if economic growth is less than expected
The compromise - which amounts to a watered down version of the original budget rules - was signed off at a full meeting of all 15 European Union member states on Tuesday morning.

But EU economic and monetary affairs commissioner Pedro Solbes said the deal undermined the Growth and Stability Pact that demands that members of the eurozone should not run up budget deficits of more than 3% of gross domestic product (GDP).

Confidence undermined

The finance ministers' leniency with France and Germany over breaking these rules also sparked concern at the European Central Bank (ECB).

The ECB's policy council held an emergency conference call, and issued a statement saying it deeply regretted the move.

"The conclusions adopted by the Ecofin Council carry serious dangers," the ECB statement said.

The failure to adhere to the Stability Pact's rules "risks undermining the credibility of the institutional framework and the confidence in sound public finances of member states across the euro area", the ECB added.

It urged France and Germany to take swift action to get their budget deficit's under control.

"It is now absolutely imperative that effective action be taken to limit negative effects on confidence," the Bank said.

Split decision

The compromise - agreed despite protests from four of the 12 eurozone nations - will see Germany cutting its budget by about 0.6% of GDP next year and 0.5% the year after.

The Commission deeply regrets that these proposals are not following the spirit and the rules... I am completely disappointed
Pedro Solbes, EU economic and monetary affairs commissioner

France is looking at 0.77% and 0.6% cuts over the same time period.

That, in theory, should get the deficits of both countries back below the mandated 3% of GDP.

But there is a get-out clause, under which the reductions will not be required if growth in the French and German economies is unexpectedly low.

"We're suspending the recommendations of the Commission," said French Finance Minister Francis Mer.

"This is the best mix, with necessary discipline on the deficit without suffocating growth."


That was not good enough for the Commission, which voiced unusually vociferous disapproval.

Europe must be constructed on the principle that the rules are applied in the same way for everyone
Rodrigo Rato, Spanish finance minister
"The Commission deeply regrets that these proposals are not following the spirit and the rules of the (EU) treaty and the stability and growth pact (on deficits)," said Mr Solbes.

"The problem is that we have a political decision (by the finance ministers) which had no legal basis... I am completely disappointed."

The Commission, he hinted, could take legal action to enforce the pact, which was originally designed to bolster the euro's credibility but which is now seen by Germany and France as too tight a straitjacket.

New treaty, old treaty

And the countries that opposed the deal - which have fought hard to keep within the letter of the pact and now see their more powerful neighbours getting away with breaching it - are also up in arms.

I can only advise the Commission to come out of its corner and stop sulking
Hans Eichel, German Finance Minister
Spain, Finland , the Netherlands and Belgium all expressed their disapproval.

Belgium's Finance Minister, Didier Reynders, said that with Europe currently trying to negotiate a constitution for the EU, creating new loopholes in an old one was unwise.

"It will be rather difficult to explain that we absolutely want to respect the rules of this new treaty at the same time as we are seeking blocking minorities to avoid applying the current treaty," he told Belgian radio station RTBF.

His Spanish counterpart, Rodrigo Rato, agreed.

"Europe must be constructed on the principle that the rules are applied in the same way for everyone," he said.

But German Finance Minister Hans Eichel defended the deal and had little time for the criticism coming from the Commission.

"I can only advise the Commission to come out of its corner and stop sulking as quickly as possible because we need a functioning cooperation between the Commission and the Council and because we want to work with the Commission," he told the German parliament.

He But he

European Commission's Gerassimos Thomas
"The member states do not stick to the rules of the treaty."

EU mulls budget deficit sanctions
24 Nov 03  |  Business
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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