16th Nov 2018

Solbes: Iraq war may allow more lenient euro rules

The war in Iraq may constitute "exceptional circumstances" leading to a relaxation of the Growth and Stability Pact, the Commissioner for Monetary Affairs, Pedro Solbes, said in an interview with French paper, Les Echos on Thursday. Solbes said that a war was "very clearly" a situation that could allow the budget deficit rules to be relaxed.

This will come as a relief to countries such as France and Germany, whose budget deficits are both above the 3 percent limit imposed by the Stability Pact. Germany is already the subject of an "excessive deficit procedure", due to its high deficit and it was recently confirmed that France overstepped the 3 percent limit in 2002.

War to have small impact on growth

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Solbes indicated that the impact of the conflict with Iraq would be relatively small - "half a growth point at the most". However, this assessment was based on the presumption that the war would be short and the oil price would fall after a short spike.

The Commissioner warned that a more lengthy conflict could bring about "a risk of recession, or at least stagnation". The Commission recently reduced its growth projection for the Eurozone in 2003 from 1.8 percent to 1 percent.

Europe needs to re-double its efforts

Whilst acknowledging that the Brussels summit would be overwhelmed by discussions on the Iraq crisis, Solbes said, "if we want Europe to rebound when the international and economic crises are over, we must progress on the aims fixed at the Lisbon Council in March 2000".

Admitting that progress had indeed been limited to date, Solbes confirmed, "the weaknesses of the European economy are the same as they were three years ago" and that "productivity has not improved and the gap between Europe and the US has even grown".

Solbes therefore called on European leaders, meeting today in Brussels, not to forget the Lisbon agenda and said that they must "redouble their efforts" if they were to meet the Lisbon aim to become "the most dynamic, knowledge based economy in the world by 2010".

Aznar begs to differ

However, Solbes appeared to be contradicted by Spanish Prime Minister, José Maria Aznar. In an interview with German weekly Die Zeit, Aznar said that "no-one should interfere with the pact", even in times of crisis.

In a pointed remark clearly aimed at Germany and France, he said that Spain had achieved above-average growth in the past seven years, "because we have done our homework".

Commenting on the Lisbon process, Aznar said that Europe "could only dream" of the growth achieved by the US. In the 1990s, the US grew on average by 3 percent every year, in stark contrast to more sluggish growth in Europe.

Growth this year in the Eurozone is expected to be just 1 percent.

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