EU Finance Ministers Debate Loosening Euro Pact

Led by the Dutch EU presidency and its finance minister, Gerrit Zalm, the politicians on Friday and Saturday discussed a plan by European Commissioner Joaquin Alumunia for easing certain provisions in the pact. Most of the EU finance ministers support giving heavily indebted countries more time to clean up their budget acts before they musst face sanctions from Brussels. But some, including the Netherland’s Zalm, are still calling for the pact’s strict 3 percent deficit spending cap to be preserved and better observed.

“It’s a nasty subject, a delicate subject,” Zalm said, “So you must not expect us to finish the debate, but maybe we can find some common ground for future work.

However, no decision is expected in the matter before 2005. German Finance Minister Hans Eichel -- whose country, like France, will this year oversee a budget that crosses the 3 percent deficit spending cap -- supports the proposal for making the rules more flexible. He also defended greater flexibility, saying it would not weaken the pack.

“It has to be applied with economic logic,” Eichel said. “ and that means you can’t try to consolidate (your budget) when you’re in the middle of an economic hole. Instead, you do it when you’re experiencing good times economically.”

Looser interpretation

Under Alumunia’s plan, Brussels would provide more exceptions from pact-regulated sanctions during difficult economic periods. Nevertheless, the European Commission is still planning to resume its deficit-related proceedings against Germany, which were illegally stopped by the Council of Ministers in November. Still, Eichel and Berlin need not fear strict conditions being placed on the German budget by Brussels.

On Friday, the German Central Bank criticized the European Commission’s plan to loosen the stability pact, saying it would undermine the body’s own credibility and that the plan would weaken the central banks’ roles as “guardian” of the currency. The bank also said the signatories of the stability pact were aware of its stringent deficit guidelines when they signed on.

But Eichel defended the EU against the criticism, saying it would not weaken the pact. “No, it doesn’t. That’s an nonsensical interpretation,” he said.

The finance ministers on Friday elected Luxembourg’s Jean-Claude Juncker as chairman of the Euro Group for the next two years. The body is comprised of the finance ministers from the 12 European Union countries that have adopted the euro, Europe’s common currency. Juncker, who is also Luxembourg’s prime minister, will begin his job as the so-called “Mr. Euro” on Jan. 1. Juncker is expected to better represent the euro abroad and also lobby the European Central Bank, which is responsible for currency and interest rate policies, on behalf of the euro zone foreign ministers.

France has long been pushing for a unified governance of the European economy that would be dictated by the finance ministers, but other countries have demanded that the European Central Bank remain independent in its policy-making activities.

Debate over corporate taxes in new EU states

On Saturday, the ministers were also expected to discuss corporate taxes in the new EU member states that some Western European countries have criticized as “dumping price” rates that give them an unfair advantage in attracting foreign investment. Both German Chancellor Gerhard Schröder and French Finance Minister Nicolas Sarkozy have slammed the low tax rates in the countries, and Sarkozy has called for the introduction of a minimum corporate tax rate. But the mostly Eastern European countries have mostly been unwilling to budge, saying the low taxes, which in some cases are as low as one-third of those rates in the old EU states, are necessary to attract businesses.

“To begin with, we need a common base for tax, and then we need to look at the facts,” Germany’s Eichel said. “In the long-term I am, as you know, a supporter of a minimum tax rate in Europe. That doesn’t preclude competition.”

Nevertheless, few expect a minimum tax rate can be imposed because tax law is now, as before, a competency that is determined at the national level and not in Brussels. Just hammering together an agreement on the calculation of corporate profits and taxable earnings will take years, according to Dutch Finance Minister Gerrit Zalm.