Court case ‘will not help’ Stability and Growth Pact

By Tim King

Date: 08/07/04

THE European Court of Justice will adjudicate on Tuesday (13 July) on a case brought by the European Commission against the Council of Ministers over the Stability and Growth Pact.

The Commission argued in a hearing on 28 April that the Council had breached its obligations under the terms of the pact, when it did not adopt recommendations to France and Germany to bring their public finances into compliance.

The Commission wants the court to annul the conclusions of the Council of economic and finance ministers (Ecofin) which effectively refrained from giving instructions to the two states, under threat of sanctions.

Pedro Solbes, then the commissioner for economic and monetary affairs, now the finance minister of Spain, persuaded his colleagues that legal action should be brought to preserve the credibility of the pact.

But this has already been holed. The president of the Commission, Romano Prodi, famously described the pact as "stupid" and conceded it should be revised. Some member states, but not all, want changes. Proposals from the Commission are awaited.

John Fitzgerald, professor at the Economic and Social Research Institute in Dublin, is one of those who have criticized the pact.

But he still believes France and Germany could benefit from complying with its terms because in doing so they would improve consumer and business sentiment.

"If French consumers went out and spent, the economy would pick up," he says, comparing the French predicament to that of Ireland in the 1980s.

Fitzgerald believes the German economy has more profound problems but could still benefit from a change in sentiment.

But he doubts that the intervention of the court is helpful to the pact.

"A court cannot decide what taxes should be raised and what spending levels should be. There is a problem with courts becoming involved in the economic area," he says.

Gebhard Flaig, of the Ifo Institute for Economic Research at Munich University, says: "The court decision might be very important for the functioning of the European Community and the eurozone but it is not so important, at least in the short term, for Germany's public finances."

Germany will continue to breach the pact this year and next year, he predicts. "We expect Germany's [gross domestic product] growth to be very low: not enough to improve the public finances," added Flaig.

Ifo forecasts growth for 2004 at 1.7%, revised to 1.2% when corrected for the number of working days.

This pessimism is widely shared, although DIW, the German Institute for Economic Research in Berlin, has revised its forecast of economic growth slightly upwards to 1.8%. Commerzbank puts growth slightly higher at 2%.

The most intractable problem is the condition of industry in eastern Germany, which is still haemorrhaging jobs.

"I do not know how you can solve this problem," says Flaig.

Labour market inflexibility, meaning the heavy costs of wage labour, will still impede recovery, he says.

And Flaig sees no prospect of change until after the elections in September 2005. "The important year will be 2006."

timking@economist.comThe Commission argued in a hearing on 28 April that the Council had breached its obligations under the terms of the pact, when it did not adopt recommendations to France and Germany to bring their public finances into compliance.

The Commission wants the court to annul the conclusions of the Council of economic and finance ministers (Ecofin) which effectively refrained from giving instructions to the two states, under threat of sanctions.

Pedro Solbes, then the commissioner for economic and monetary affairs, now the finance minister of Spain, persuaded his colleagues that legal action should be brought to preserve the credibility of the pact.

But this has already been holed. The president of the Commission, Romano Prodi, famously described the pact as "stupid" and conceded it should be revised. Some member states, but not all, want changes. Proposals from the Commission are awaited.

John Fitzgerald, professor at the Economic and Social Research Institute in Dublin, is one of those who have criticized the pact.

But he still believes France and Germany could benefit from complying with its terms because in doing so they would improve consumer and business sentiment.

"If French consumers went out and spent, the economy would pick up," he says, comparing the French predicament to that of Ireland in the 1980s.

Fitzgerald believes the German economy has more profound problems but could still benefit from a change in sentiment.

But he doubts that the intervention of the court is helpful to the pact.

"A court cannot decide what taxes should be raised and what spending levels should be. There is a problem with courts becoming involved in the economic area," he says.

Gebhard Flaig, of the Ifo Institute for Economic Research at Munich University, says: "The court decision might be very important for the functioning of the European Community and the eurozone but it is not so important, at least in the short term, for Germany's public finances."

Germany will continue to breach the pact this year and next year, he predicts. "We expect Germany's [gross domestic product] growth to be very low: not enough to improve the public finances," added Flaig.

Ifo forecasts growth for 2004 at 1.7%, revised to 1.2% when corrected for the number of working days.

This pessimism is widely shared, although DIW, the German Institute for Economic Research in Berlin, has revised its forecast of economic growth slightly upwards to 1.8%. Commerzbank puts growth slightly higher at 2%.

The most intractable problem is the condition of industry in eastern Germany, which is still haemorrhaging jobs.

"I do not know how you can solve this problem," says Flaig.

Labour market inflexibility, meaning the heavy costs of wage labour, will still impede recovery, he says.

And Flaig sees no prospect of change until after the elections in September 2005. "The important year will be 2006."

Preview of an adjudication by the European Court of Justice on 13 July 2004 in a case brought by the European Commission against the Council of the European Union over the Stability and Growth Pact over its failure to act against budget deficits in France and Germany.

http://ec.europa.eu/comm/economy_finance/about/activities/sgp/main_en.htm http://ec.europa.eu/comm/economy_finance/about/activities/sgp/main_en.htm

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