EU attempts to make stability and growth pact flexible

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The Independent Online

Plans to revamp the euro's battered rulebook won key backing yesterday, as the European Commission bowed to the inevitable and called for more flexible implementation of the single currency's widely flouted rules.

The new blueprint would allow much more freedom to consider countries' economic situation before penalising them for breaking the eurozone's main economic targets. However, yesterday's plan left open crucial questions of how a revised rulebook would be policed, and whether it would have any real teeth.

The announcement marks the final demise of the so-called stability and growth pact, which is likely to be breached by no fewer than six of 12 eurozone countries this year. Paris and Berlin famously failed to abide by injunctions to cut budget deficits during an economic downturn, saying the pact was too rigid and could plunge them into recession.

Their ability to flout the rules with impunity dealt a lethal blow to the credibility of the pact, which was once derided as "stupid" by the European Commission president, Romano Prodi.

The Commission admitted yesterday that the tensions had accumulated, and led to "a loss of credibility and ownership and institutional uncertainty". The strategy of the economic and monetary affairs commissioner, Joaquin Almunia, has been to salvage as much of the pact's substance as possible, while making its implementation more flexible. The pact's central features would be retained, in particular the insistence that nations' budget deficits should not exceed 3 per cent of gross domestic product, with a 60 per cent ceiling for government debt.

The planned changes draw on a wide consensus that countries should be encouraged to consolidate in years of growth to avoid making cuts during a downturn. Member states would have discretion to exceed the 3 per cent deficit ceiling if growth slowed, an exemption that could - had it been in force - have let France and Germany off the hook. An existing get-out applies only if growth hits minus 2 per cent. That will be re-written to cover "a protracted period of sluggish growth leading to a substantial loss of cumulated output".

The proposals also call for more "early warnings" and incorporate ideas, championed by the Chancellor, Gordon Brown, to give greater attention to long-term debt. These would allow more flexibility on budget deficits to nations such as the UK, or the member states that have recently joined the EU, that have a low government debt but need to invest to build up their infrastructure.

Reaction to the plans was largely positive yesterday, with the statement welcomed both by Hans Eichel, Germany's Finance Minister, and the Dutch presidency of the EU. The Netherlands was one of a group of smaller countries that was infuriated by the way in which France and Germany escaped punishment for breaking the rules three years in a row.

The changes could also help remove some of the technical obstacles to British membership of the euro.

Member states themselves will decide how to re-write the pact; no decision is expected until next year. Fears remain, however, that giving greater discretion over the implementation of the rules could make the process even more vulnerable to lobbying.

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