EU Proposes Easing of Euro Stability Pact

European Union countries that have been violating the Stability and Growth Pact in an atmosphere of weak economic growth may soon be able to breathe a sigh of relief.

At its regular meeting on Thursday, the European Commission recommended that a country's economic situation should be taken into account when applying the pact, which secures the stability of Europe's common currency, the euro.

"The experience of the last five years has shown that -- in certain cases at least -- the rules have perhaps been too stringent and have reduced our room for maneuver," Economic and Monetary Affairs Commissioner Joaquin Alumnia said. "That is why it is probably necessary to clarify certain definitions of the rules on the excessive deficit procedure -- we have to introduce some flexibility."

More leeway in hard times

Alumunia suggested greater leeway should be given to countries with low debt levels and sustainable public finance, so long as they were also encouraged to balance budgets in better times. The move represents a 180-degree shift by the Commission, which has argued vociferously in recent months for the strict pact not to be altered.

Speaking ahead of Alumnia's announcement on Wednesday, German Finance Minister Hans Eichel greeted the Commission's shift, saying it was "self-evident that Germany would participate if the Commission laid new proposals on the table."

The Growth and Stability Pact has proven a major source of conflict between a handful of EU member states and the Commission. Last November, German Finance Minister Hans Eichel (photo) pushed successfully in the Council of Ministers for the suspension of disciplinary action against those countries currently flouting the deficit spending limit of 3 percent of gross domestic product.

The Commission had demanded Germany and France undertake further steps to reduce their deficits, but EU finance ministers instead agreed to a political commitment from Berlin and Paris to pursue budget consolidation. The euro zone's two largest economies are set to breach the deficit limit for the third year in a row in 2004. The Commission is currently suing in the European Court of Justice to determine the legality of the finance ministers' move.

A constitution setback for the Commission

During negotiations last week over the final draft of Europe's first constitution, the Commission failed to add teeth to its enforcement role of the Stability Pact. Currently, the European Commission has the direct power to take legal action against member states who violate the pact, with the conceivable ability to extract billions of euros in fines. In the future, the Commission can recommend that action be taken, but such action would require the approval of a qualified majority of EU countries in the Council of Ministers representing three-fifths of the EU's population.

Nonetheless, the member states, including Germany and France, have pledged their support for the principles of the pact and the need for greater economic coordination.

A future European economic government?

In an interview with the Financial Times published on Wednesday, French Finance Minister Nicolas Sarkozy called for the creation of an "embryo of a European economic government" through the strengthening of the powers of the eurogroup, the 12 EU member countries that have abandoned their national currencies in favor of the euro.

Under the new EU constitution, the eurogroup would be given considerable powers -- including the ability to decide on new members and the enforcement of the Stability and Growth Pact.

"It is really good that we are 12 countries with a single currency," he told the paper, "with in theory a single economic policy and a single central bank. But there is no single economic governance."

Speaking before the French National Assembly on Thursday, Sarkozy said flexibility is essential. "When a country has three percent growth, then a three percent deficit is far too much," he said. "But when you've got a 1 percent recession, then a 3 percent deficit has absolutely no meaning."

Opposition: changes 'counterproductive'

In Germany on Thursday, conservative opposition politicians criticized the Commission's plan. Werner Langen, a German member of the European Parliament from the Christian Democratic Union called the plan "premature" and "counterproductive," according to the Süddeutsche Zeitung newspaper. Langen said the current pact already offers sufficient flexibility for steering euro zone members through economic crises and external shocks. The problem is that the two biggest EU countries, Germany and France, neither have the "political will or strength" to adhere to the rules, he said.

Nevertheless, Alumnia said government leaders would continue to negotiate with member states over the proposal, and that a formal proposal would likely be completed in the Fall, possibly after the new European Commission is appointed.