The stability pact must be reformed - but with care

There is growing consensus throughout Europe that the Stability and Growth Pact has had its day - at least in its present form. Most governments accept that the fiscal regulations that underpin the euro are simply too restrictive. When EU finance ministers met in Brussels this week, the debate was not about preserving the status quo, but over how far to go in loosening the pact.

There is growing consensus throughout Europe that the Stability and Growth Pact has had its day - at least in its present form. Most governments accept that the fiscal regulations that underpin the euro are simply too restrictive. When EU finance ministers met in Brussels this week, the debate was not about preserving the status quo, but over how far to go in loosening the pact.

Proposals that eurozone countries which breach the terms of the pact should be treated leniently in specific circumstances found widespread support. It was agreed that, if a nation's domestic economy is in recession or if funds are needed to shore up pension and healthcare services, it should be spared warnings and penalties. But the talks appear to have broken down over Germany's insistence that it be given a specific "let off" based on the costs of German reunification - something other governments fear would give Germany carte blanche to keep borrowing.

The economies of the eurozone are in poor health. France and Germany have produced meagre growth in recent years. Both nations clearly need a degree of fiscal stimulus. And both have a case when they argue that the stability pact is tying their hands in this respect. When the pact was implemented six years ago, the fear of its - mainly German - architects was inflation, rather than low growth and deflation. Now the opposite is true.

However, it is important that European ministers do not go too far in loosening the rules. Governments must not be allowed to undermine the euro through irresponsible spending. The pact must have teeth. There is always a temptation for governments to buy their way out of domestic difficulties, especially if an election is on the horizon. Spending public money is often a convenient substitute for tough reforms. The French and German governments, who have both breached the pact's excessive deficit limits, have been guilty of this to a certain extent.

It is vital that larger nations are not allowed to flout the rules, especially when smaller nations have scrupulously adhered to them. The stability pact should be reformed - but the regulation of the eurozone must not be tailored simply to serve its most powerful members.