Monday

22nd Apr 2019

Brussels forced to relax euro discipline

The current state of the French and German economy has for the first time forced the EU Commission to give in and relax demands of balanced budgets as defined in the Stability and Growth Pact. The demand of balanced budgets by 2004 was postponed till 2006 in a report on "Budgetary challenges in the euro area" presented on Tuesday by EU Commissioner for Economic and Monetary Affairs, Pedro Solbes in agreement with the European Commission president, Romano Prodi.

The report showed that both Germany and France might well breach the 3 per cent budget deficit ceiling this year. Mr Solbes also confirmed that EU growth this year would be less than 1 per cent.

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The relaxing of the rules could damage the credibility of the currency, but the Commission insists the Stability Pact itself would not be altered; just the way the rules are enforced is changed.

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 spending, 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.

For French Prime Minister Jean-Pierre Raffarin the Commission decision on Tuesday was good news. He will announce today in Paris the French 2003 budget bill.

While relaxing the deadline on balanced budgets, the Commission initiated on Tuesday the Excessive Deficit Procedure against Portugal after receiving official confirmation that the general government deficit in 2001 amounted to 4.1 per cent of GDP, thereby clearly exceeding the reference value of 3 per cent of GDP.

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