Budget fates await Greece and Hungary

By Anna McLauchlin

Date: 13/01/05

Eurozone finance ministers will decide on Monday (17 January) whether to delay action against Greece and Hungary for failing to bring their budgets into line with EU rules. Insiders believe that they will probably put decisions on hold until reform of the Stability and Growth Pact is agreed.

On Monday ministers will be in the same position as in November 2003 when the European Commission recommended that they take action against France and Germany for exceeding the pact's 3% of gross domestic product (GDP) budget deficit limit. Under the pact's rules, France and Germany would have had until the end of 2004 to rein in their spending and could have faced financial penalties if they failed to do so.

But ministers gave the eurozone's biggest economies an extra year to get their spending in order. Last month the Commission announced that both countries were "on track" to bring their deficits below the benchmark level and that no further measures were needed.

Against this background, invoking the pact against Greece and Hungary would be problematic, even though they are currently running deficits of 5.3% and 6% of GDP. "My feeling is that there will be no vote," said one source close to the discussions.

Economic and Monetary Affairs Commissioner Joaquín Almunia said yesterday (12 January) that he still hoped that ministers would back the Commission's position.

But the imminent modification of the pact, also up for discussion on Monday, might make it even more difficult for ministers to take a decision under the pact in its current form.

Almunia wants an agreement next week on how the pact should be made more flexible, so that EU leaders can adopt a resolution at the Spring summit on 8 March. Potential changes include incentives for countries to set aside more funds when their economies are booming to give room for manoeuvre when they slow. The Commission would put more emphasis on the 60% of GDP debt limit and give more flexibility in deficit reduction periods, for example giving longer if the economy stagnates. It would also introduce a 'stop-the-clock' mechanism to suspend the pact if there are yet-to-be-decided exceptional circumstances. The reform could include the creation of national budget bodies to keep governments in check.

Smaller countries that have made important spending cuts to keep their deficits in line, such as the Netherlands, oppose loosening the rules, as does the European Parliament's largest group, the centre-right EPP-ED, and the European Central Bank.

Italy, France and Germany have asked for some spending to be excluded from the deficit calculations.

But Almunia says the Commission would reject any change to deficit calculation that could threaten the 3% limit and any spending exclusions would have to be decided on a case-by-case basis.

Preview of a meeting of Eurozone Finance Ministers on 17 January 2005 where a decision is due to be taken on whether to delay action against Greece and Hungary for failing to bring their budgets into line with EU rules.