EU Moves to Renew Battered Fiscal Rules

EU finance ministers meet from Monday evening striving to agree on amendments to the Stability and Growth Pact, the set of fiscal rules underpinning Europe's single currency the euro.

The EU's current Luxembourg presidency hopes the two-day ministerial talks will pave the way for final agreement at an EU summit in Brussels on March 22-23. "The plan is to get as close as possible to an agreement," said a Luxembourg diplomat, adding that the EU leadership would circulate a document proposing a basis for discussion by ministers.

The 1997 budget pact was all but suspended in November 2003 when EU heavyweights France and Germany were let off the hook despite repeatedly breaching a key requirement of the rule book. The pact notably stipulates that members of the 12-nation euro-zone must not run public deficits in excess of three percent of GDP.

Since then nearly half the EU's 25 states have also triggered disciplinary measures under the pact, while the system's already-strained credibility has also suffered after it emerged that Greece had for years submitted wrong data.

Reform without threatening recovery

Now the EU -- still struggling to emerge from a prolonged economic slowdown -- is determined to renew the budget rules in a way that will not threaten recovery. To this end the revised pact is expected to allow more flexibility for countries to run bigger deficits during slowdowns, so long as they make up the difference when growth returns.

Key to the amendments is the so-called "excessive deficit procedure," triggered when a country's accounts run too far into the red, allowing a series of warnings and ultimately the threat of huge fines. "The main outstanding point is the question of triggering the excessive deficit procedure," said one EU source.

EU heavyweights led by Germany in particular insist that the procedure should not be initiated automatically when deficit slips above three percent of GDP but should take into account a range of other factors.

"A really central criterion for us is how the economy is developing," said German finance minister Hans Eichel. "In order to reduce debt, both things are needed together -- strict fiscal policy and growth."

Italian Prime Minister Silvio Berlusconi warned Friday that Rome will veto any system that is not sufficiently flexible. In particular he wants certain expenses, notably spending on infrastructure, to be excluded from deficit sums. "I will fight at the March EU (summit) to change the parameters set by the stability pact. Without modification I am ready to block things," he said.

"Credibility needs to be preserved"

EU monetary affairs commissioner Joaquin Almunia, tasked with policing the pact, warned last week against "introducing uncertainty into the decision about the existence or otherwise of an excessive deficit."

European Central Bank (ECB) chief Jean-Claude Trichet echoed that point Thursday. "The credibility of the excessive deficit procedure needs to be fully preserved," he said. "This is not only fundamental for macroeconomic stability and cohesion in the euro area but also for confidence and growth prospects in all member states."

The 12 euro zone ministers will meet on Monday, while ministers from all 25 EU member states will meet Tuesday.