Cyclical adjustments rethink for stability pact

Date: 21/03/02

By Peter Chapman

THE European Commission is willing to consider reforming the EU's Stability and Growth Pact so that it takes more account of cyclical adjustments in future, a senior official has told European Voice.

Jonathan Faull, director-general of the press and communication service, said that while there was no question of scrapping the stability pact, a review of how it is applied would be 'sensible'.

He said this could involve taking a look at how finances fluctuate 'over the economic cycle'.

His comments follow last month's furore over the Commission's decision to warn Germany and Portugal that they were close to breaking the pact's rules, which state that a country's budgetary deficit must not exceed 3 of GDP.

Finance ministers declined to issue a formal censure, following a backlash from Berlin and Lisbon. Monetary experts including MEP Chris Huhne and Rosemary Ratcliffe, chief economist for PricewaterhouseCoopers, echoed the case being made in the capitals for the pact to take account of cyclical factors. German Chancellor Gerhard Schröder raised the issue at Barcelona with Commission President Romano Prodi, who indicated there was scope for the EU to amend the existing system. That could mean there would be more flexibility shown to governments that borrow during lean times when their tax revenues drop. However, those piling on the debt when their economies are booming would be put under the spotlight far sooner.

Faull spelt out the Commission's thinking on the issue, declaring: 'For the moment, the stability pact is there and has served us well. But if, in time, people want to have a look at how it's applied, in a tranquil moment, of course that is the sensible thing to do.'

Prodi and Schröder are expected to discuss the matter further when the Commission president visits Berlin with a group of Commissioners in the near future.

Germany is also concerned about 'Brussels bias' over state aid to coal companies and proposed rules for company take-overs.

The European Commission is willing to consider reforming the EU's Stability and Growth Pact so that it takes more account of cyclical adjustments in future, according to Jonathan Faull, director-general of the Press and Communication Service.