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Last Updated: Wednesday, 28 April, 2004, 12:26 GMT 13:26 UK
EU deficits row reaches court
Euro banknotes
Critics say the eurozone's Stability Pact is outdated
The key rules which underpin Europe's single currency are at the centre of a case being heard on Wednesday at the European Court of Justice.

The European Commission brought the case after the breakdown of the Stability and Growth Pact last year.

The pact was designed to ensure that countries joining the euro kept their economies in line.

In particular, governments had to keep their budget deficits within 3% of gross domestic product (GDP).

Pact broken

The pact ran into serious trouble in November last year when both France and Germany escaped punishment for their large deficits.

The eurozone's two largest economies defied the 3% limits and blocked European finance ministers from imposing large fines on their economies, on the grounds that they were still deep in recession.

The European Commission in its challenge at the European Court of Justice argues that finance ministers, after agreeing with the economic analysis of budget control within the limits set, had no legal basis under EU law to suspend disciplinary action by failing to adopt a formal decision on the matter.

The finance ministers' decision to suspend the rules to let France and Germany off the hook might have been illegal

"The court case is not about economics, it's about the legal interpretation of the treaty," a commission spokesman said.

Italy warning

The outcome of the court's decision will have major implications, not least because recent forecasts suggest up to half the eurozone countries will breach the very same rule this year.

In an attempt to restore lost authority, the European Union's head office on Wednesday called for a warning against Italy - its debt is currently the highest at 106% of GDP - and made a statement about the single currency.

"Our single currency, the euro, is young and we have to ensure that our policies are transparent and predictable", EU Economic and Monetary Affairs Commissioner, Joaquin Almunia, said.

Tax cuts

The system as it stands has a number of problems in working effectively.

Firstly disciplinary warnings dished out by the commission are being brushed off by the prime ministers of the countries concerned.

Italian premier Silvio Berlusconi is insisting that, like President Jacques Chirac of France last year, he is using tax cuts to improve economic growth.

Cutting taxes worsens a budget deficit in the short term.

Also, the EU finance ministers must approve the commission's recommendations.

The commission can only make recommendations.

Even from within the European Commission itself the view on the rules is changing.

Mr Almunia, who took over from Pedro Solbes, feels some reform of the euro rules is necessary to take better account of public debt and other criteria.

Back in line

Meanwhile budgetary discipline is improving in some countries.

Portugal has managed to rein in its spending for two years in a row.

It was the first country to face disciplinary action in 2002.

Britain and the Netherlands also escaped disciplinary action after they went over the limit in 2003 because the commission took into account that they were both coming back into line.

The deficits court case is being heard under a special fast-track process and judges should deliver a verdict within six months.

The BBC's John Moylan
"The implications for both the European Commission and EU member states are huge"

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07 Apr 04  |  Business
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25 Nov 03  |  Business

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