Commission sets timetable for EMU ‘stability pact’ fines

Date: 05/09/1996

By Tim Jones

THE European Commission is set to propose that monetary union members who lose control of their public spending should face cash sanctions within nine months.

In a paper prepared for EU finance ministers when they meet informally in Dublin on 21 September, the Commission accepts much of the German government's plan for a 'stability pact'.

It closes many of the loopholes in Article 104c of the Maastricht Treaty, which stresses that Euro-zone member states should keep their budget deficits below 3&percent; of Gross Domestic Product or face a long and drawn-out censure process.

In accordance with Germany's wishes, the Commission proposal establishes a timetable for correcting fiscal errors, although the bolt-tightening has not been as tough as Bonn might wish.

In the most recent version of his stability pact, German Finance Minister Theo Waigel called for a gap of just six months between detecting that a member state was running an excessive budget deficit and punishing it with a cash penalty.

Every year, reliable data on a government's finances for the previous year should be available in March. Under Waigel's plan, the Commission would then have four weeks to prepare a report on the deficit and the member state concerned would have a further four weeks to respond to a vote of censure by finance ministers of the Euro-bloc.

Failure to satisfy the bloc within four months would mean that the member state concerned would have to make a large non-interest-bearing deposit at the European Central Bank. If the deficit had still not been put right two years later, the deposit would turn into a fine.

The Commission's version of the pact includes elements of this timetable, but gives the errant member state nine months to satisfy other governments that “effective measures” have been taken to correct the fiscal imbalance.

By opting for a nine-month deferral of punishment, the Commission believes it can win over some of the smaller member states sceptical about Bonn's tight deadlines. At the same time, it hopes the fact that the transgressor would be punished in the same year as the deficit was detected will be enough to gain Waigel's support in Dublin.

Nevertheless, the Commission knows this will not be plain sailing, since Waigel has problems with other aspects of its proposal.

For example, he wants the deposit/fine to be a genuine deterrent, accounting for 0.25&percent; of GDP for every percentage point the deficit exceeds the 3&percent; target, with no upper limit.

The Commission, on the other hand, has called for the fines to stop once the deficit comes close to 6&percent; of GDP.

Moreover, the Commission paper has chosen not to define the “exceptional” circumstances under which a deficit would be allowed to exceed 3&percent; of GDP, and how “temporary” this overshoot should be.

The Germans want to keep this definition tight - allowing leeway for negative growth of 2&percent; over four successive quarters or major natural disasters.

“We want to have a quantitative approach so that we do not leave anything open to interpretation,” said a German official.