Stability and Growth pact: European Commission suggests postponing the deadline date for balanced budgets until 2006, September 2002

At the weekly meeting of the European Commission held in Strasbourg on 24 September 20002 Pedro Solbes, European Commissioner for Economic and Monetary Affairs, presented a report on the state of the stability and growth pact in which he suggested that the deadline date for balanced budgets should be put back from 2004 until 2006.

The report [SEC(2002)1009/2], which is yet to be made public, is the first definitive sign that the European Commission may be considering relaxing the rules of the stability and growth pact amid fears that France, Germany and Portugal may all exceed the 3 per cent budget deficit ceiling in 2002.

The Stability and Growth Pact (SGP) was adopted at the Amsterdam European Council in June 1997. The Pact aims to strengthen the so-called Maastricht-Treaty criteria and to ensure that all Member States contribute towards the overall climate of stability and financial prudence upon which the success of economic and monetary union depends by demanding that eurozone countries never run a deficit in the public spending, which is more than 3 per cent of the GDP. Article 104(3) of the Treaty provides for the European Commission to take action in the case of excessive government deficits, saying:

If a Member State does not fulfil the requirements under one or both of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium term economic and budgetary position of the Member State. The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State.

According to the media, the reporton 'Budgetary challenges in the euro area' foresees the demand of balanced budgets by 2004 postponed till 2006 because of recent economic difficulties across Europe. In the report, Pedro Solbes confirmed that EU growth this year would be less than 1 per cent and it is believed that he is keen to introduce more flexibility into the SGP which would help to stimulate growth during slow periods.Tougher deficit targets would then be introduced once the economy picked up. The report suggests that in the future, the European Commission should focus on structural deficits to see how much of a country's fiscal deficits stems from cyclical conditions. Those countries with the largest deficits would be expected to cut their structural deficits by at least 0.5% a year.

In presenting the report Pedro Solbes was keen to emphasise that the stability pact itself would not be altered, only the way the rules are enforced are to be changed. However, many fear that such action could threaten the credibility of the single currency. The European Central Bank have suggested that it would weaken confidence in the euro and the German government has indicated that it would oppose any changes to the pact despite the possibility that it will exceed the budget deficit in 2002. In a quote in the Financial Times, the German foreign minister, Hans Eichel, said:

'I am worried about the inclination of certain countries to weaken the Stability and Growth Pact. Even in election time we must stick to the pledges of the pact'.

France and Italy are the two countries who are most in favour of introducing greater flexibility to the pact but they are also believed to be the main targets of Solbes' criticisms that 'some countries are hiding behind the economic slowdown'. Both countries are due to publish their budgets by the end of September 2002.

Undoubtedly, the report is likely to stimulate more controversy about the pact. Many believe that it was held off until after the German election because of its sensitive nature. In fact it was presented on the same day as the European Commission took the first step in the excessive deficit procedure against Portugal whose general government deficit in 2001 amounted to 4.1% of GDP.

With fears that Portugal, France and Germany could all exceed the deficit in 2002 the report is seen as an attempt to introduce modest changes that could prevent demands for more radical reform or even the scrapping of the pact altogether.

Links:

European Commission:

• Agenda for the 1582nd meeting of the Commission to be held in Strasbourg, Tuesday 24 September 2002
• 24.09.02: Commission adopts report on government finances in Portugal as a first step of the Excessive Deficit Procedure [IP/02/1360]

EUROPA: EUR-LEX:

• Consolidated version of the Treaty establishing the European Community(For Article 104, go to p48)

EUROPA:SCADPlus:

• Resolution of the European Council on the Stability and Growth Pact
• Excessive deficit procedure

BBC News Online:

• 24.09.02: Euro rules 'need relaxing'

European Sources Online: Financial Times:

• 25.09.02: How Europe's stability pact buckled under slowing growth and political resistance to budget discipline
• 25.09.02: EU states threaten credibility of deficit pact
• Portugal chafes under the yoke of austerity

European Sources Online: Topic Guides:

• Economic and Monetary Union

European Sources Online: In Focus:

• 12.07.02: European Commission looks set to ease the rules of Stability and Growth pact

Helen Bower
Compiled: Wednesday, 25 September 2002

On 24 September 20002 Pedro Solbes, European Commissioner for Economic and Monetary Affairs, presented a report on the state of the stability and growth pact in which he suggested that the deadline date for balanced budgets should be put back from 2004 until 2006.