Euro Stability Pact in trouble

14.08.02 @ 08:31

  1. By Lisbeth Kirk
  2. Lisbeth email

A number of larger EU states are facing growing difficulties in living up to the demands of the EU Stability and Growth Pact, which entered into force in 1999 to support the strength and the confidence in the new single currency, the Euro.

Not only a small state like Portugal but also the biggest EU states such as Germany, France and Italy are all facing severe problems in relation to the Pact and pressures to change it might become very strong in the autumn, after the German election on 22. September.

Germans in their own prison

The Stability and Growth Pact was agreed at the Amsterdam Summit in June 1997 in return for the German acceptance of swapping the stable Deutsch Mark for the Euro. The Pact strengthens the so-called Maastricht-Treaty criteria, demanding euro-countries never to run a deficit in the public budget, which is more than 3 per cent of the GDP. If euro-countries do not live up to the Pact, they risk paying penalties. Besides, public debt cannot grow higher than 60 per cent of the GNP in euro-member states, the Pact demands. In addition, the European Central Bank demands that annual inflation does exceed 2 per cent.

The tight demands are "idiotic," according to a leading article published under the title "The Instability Pact," by the Norwegian paper, Dagens Næringsliv. The real trouble is, however, that it might not be enough to change the Stability and Growth Pact as not even the Maastricht-Treaty criteria can be met. To change this treaty is not as easy as changing the politically agreed Stability and Growth Pact. EU treaties can only be changed in an intergovernmental conference and treaty revisions must be ratified by all the 15 EU member states.

Room for manoeuvre is very narrow and is causing problems in a number of euro-member states facing economic recession and growing unemployment. In Germany the Pact has long been an election issue. Germany narrowly avoided a formal reprimand over its budget deficit by the EU in February, after European finance ministers rejected a proposal by the European Commission that a reprimand be issued to both Portugal and Germany.

“The story of Germany and the Stability Pact is the tale of policemen, who end up in jail themselves”, one Italian politician commented, according to the Financial Times Deutschland.

German finance minister, Hans Eichel, on Monday said in meeting in Wiesbaden: “We will receive no warning-letter”. Such letters are sent from the Commission, when euro-states are getting too close to the agreed limits of public spending and debts. However, Mr Eichel added, if the Conservatives are winners of the elections, Germany is sure to receive such a warning, as the Conservatives in the election campaign have presented several proposals, which cannot be financed without breaking the premises of the Pact.

Italy waiting for changes

Also in France and Italy, political leaders are facing growing problems to live up to election promises without breaking the Pact. Italy wants the 3 per cent limit for deficit in the public budget to be raised to 4 per cent. Instead of shaping up the Italian economy, it seems the Berlousconi government is now just waiting for other Euro-states to call for changes in the Pact.

France escaped narrowly a warning in June, by scoring a coup at the Seville Summit by promising to bring its budget close to balance by 2004, but making conditional on French economic growth which is set at an ambitious 3% per year - a figure many see as very unrealistic. Now there are reports that France is running a deficit very close to the Pact's 3% threshold.

As regards Portugal, the new government in June released figures that showed a much higher budget deficit (3.85%) than the previous government reported. The European Commission said that it was legally obliged to take action against Portugal.

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