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To: Tom Smith who wrote (262842)	10/6/2003 7:59:43 PM
From: Haim R. Branisteanu	Read Replies (2) \| Respond to of 436258

Stability pact struggles with severe instability (The Guardian) Monday, October 6, 2003 guardian.co.uk When the eurozone's finance ministers meet in Luxembourg tonight they will be hard-pressed to salvage even a shred of credibility for the rules which are meant to bind them together. The stability and growth pact, which underpins the single currency, has been looking increasingly threadbare for months, but with France now defiantly breaching it and Germany following suit it appears that most member-governments have decided that the best thing to do is to put the pact quietly on hold. Last Friday was the deadline for France to convince the European commission that it is taking sufficiently tough action to pull its budget deficit back beneath the 3% of GDP ceiling set in the pact. But with the downturn in the economy hurting revenues and President Chirac intent on fulfilling his electoral promise to cut taxes, its latest budget showed it meeting the rules only by 2005. Even that was a concession to the commission - its previous set of sums showed it breaching the rules until 2006. Germany, the eurozone's largest economy, could see its deficit move above 4% next year, but with the economy in recession its chancellor, Gerhard Schröder, plans to go on implementing the tax cuts he promised the electorate, too. "Against this background, it is difficult to avoid the conclusion that the pact has effectively been suspended," said Anthony Thomas, economist at Dresdner Kleinwort Wasserstein, last week. He calculates that six of the euro's 12 members are planning to loosen fiscal policy next year despite the parlous state of collective eurozone finances. Pedro Solbes, the EU's economic affairs commissioner, was talking tough on Friday night, saying that France had failed to comply with the rules. Theoretically, Paris could literally pay for being prodigal - the pact allows for swingeing fines to be imposed on countries that break the rules, and the commission could begin drafting specific budget measures as early as this month, which France could be forced to take. Any penalties, however, have to be approved by the finance ministers of member governments, and it is hard to imagine Germany, for example, wedged in its own sticky fiscal spot, giving the nod to punishing France. All this is exactly what sceptical economists (and the Treasury) have always pointed to as the problem with the pact. If the economy is in a downturn, the last thing governments should be doing is increasing taxes, or cutting spending; but that is what the stability pact forces them to do. There is a political dimension, too. When times are hard the electorate is unlikely to stomach an extra turn of the fiscal screw to comply with the imperatives of Brussels; and there is often extra credibility to be won for tough-talking politicians if they can be seen to be putting the needs of the people before the demands of international pacts. Ironically, it was Germany, keen to preserve the Bundesbank's legacy of fiscal rectitude and prevent more profligate countries damaging the credibility of the currency, which insisted on the pact's fiscal rules. Now finds itself as one of the offenders. Smaller countries, such as Austria and the Netherlands, which have worked hard to meet the rules and risked the electoral consequences, are furious. Karl-Heinz Grasser, the Austrian finance minister, said on Friday that governments "must stand ready to initiate sanctions" against France. But chancellor Schröder is already on record calling for a dose of flexibility in the way the rules are handled while the French finance minister, Francis Mer, has made it clear his priorities lie with fixing France's economy, not shaving extra billions off its deficit. Meanwhile, the European Central Bank has no intention of cutting domestic governments any monetary slack to help them out of their mess. Wim Duisenberg took the opportunity of his last press conference as ECB chairman in Lisbon last week to remind governments of their responsibilities. "It is fundamental that the credibility of the institutional underpinnings of the European monetary union be maintained," he said, and Paris can expect no sympathy from Duisenberg's French successor, Jean-Claude Trichet. France has hinted that it hopes the commission will invoke the "special circumstances" written into the small print of the pact to grant it an exemption from censure - but with the eurozone's two largest economies flagrantly in breach of the pact, maintaining its credibility now requires re-writing it, not coming up with a face-saving fiscal fudge.