Time for stability pact rethink after German row, say MEPs

Date: 14/02/02

By Peter Chapman

A LEADING economist and financial experts in the European Parliament are calling for urgent revisions to the EU's Stability and Growth Pact after Germany and Portugal this week managed to escape formal censures over the state of their public finances.

Potential changes cited by, among others, Rosemary Radcliffe of PricewaterhouseCoopers and German socialist MEP Christa Randzio-Plath include a rethink of the way the Union disciplines fiscally wayward member states. 'I think there should only be a warning and a sanction if a member state is making wrong policy decisions,' said Randzio- Plath, chairwoman of the Parliament's economic and monetary committee.

'You should question the absurdity of the situation when you say to a member state 'you are approaching 3 and you should at all costs follow your policy'.'

Randzio-Plath said an early warning system run by the Commission and then member states 'is a sort of fiction' if alarms are publicised before countries have had a chance to put their house in order.

'The whole procedure was foreseen to be secret,' she said. 'Only if there had been a sanction and the government did not follow the recommendations of the Council and Commission should it have been made public as a further sanction.

'In the case of Germany, the public sanction was before the Commission had even treated the subject. This was not a good application of the Stability and Growth Pact.'

Randzio-Plath also said the pact's requirement that member states' budget deficits stay within 3 of gross domestic product in the medium term should be replaced with a new measure adjusted for a country's position in the business cycle.

She said this would make sure countries - such as Germany - are not rapped on the knuckles if their public finances are dragged down by a recession.

Randzio-Plath said the stability and growth pact ignored the word 'growth' and made no allowances for countries that had veered off the straight and narrow to make investments in infrastructure, education and jobs.

'Maybe in Barcelona there is a chance that governments will...try to understand that they have an obligation to do something to make the European growth engine work better,' she said.

Randzio-Plath's colleague on the economic and monetary affairs committee, UK liberal Chris Huhne, said he also favours a change to a cyclical adjustment - insisting it would not weaken the pact. He said it would have started alarm bells ringing when Berlin - which had a deficit of 0.9 in 1999 - relaxed its fiscal policy by 1.1 by 2001.

'If such a thing had been up and running...we would not have had to wait until a recession,' Huhne said. 'But this is not in any way questioning the Stability and Growth Pact.'

Radcliffe, chief economist for accounting and finance giant PricewaterhouseCoopers, said the EU would be 'very well advised' to shift to a cyclically adjusted measure - which should be closer to 1 than the 3 unadjusted figure.

Such a move would still have shown up Germany and Portugal's recent deficit woes. But Radcliffe said it would have meant less pressure on Berlin - whose cyclically adjusted budget deficit is likely to be around 1.7 this year.

She said German Finance Minister Hans Eichel was forced to promise fiscal tightening 'when he should have been making sure there is the right environment for a proper recovery'.

She added: 'If the figures were adjusted cyclically, they will be in a position of difficulty but they would not look like such bad boys. There would have been a flashing light but the debate would have been couched in more sensible terms.'

A leading economist and financial experts in the European Parliament are calling for urgent revisions to the EU's Stability and Growth Pact after Germany and Portugal managed to escape formal censures over the state of their public finances.