EU seeks stability pact peace

Date: 13/06/1996

By Tim Jones

GERMANY'S attempts to win legally binding commitments to restrain budget deficits in a single currency area continue to run into stonewalling from other member states.

Although Bonn discovered as long ago as January that its demand for automatic sanctions would be contrary to the Maastricht Treaty, it has not given up on the idea - and is certain to raise it again at an informal meeting of the EU's monetary committee in Sweden this weekend and at next week's Florence summit.

Finance Minister Theo Waigel did not back down at all during discussions with his EU colleagues in Luxembourg last week.

It was he, after all, who came up with the idea of a budgetary stability pact to reassure Germans that they were not giving up their rock-solid marks for unstable euro.

His persistence, and that of his top official Jürgen Stark, has convinced even more sceptical member states that Waigel must be given as binding a commitment to budgetary good behaviour as they can possibly offer him under the treaty.

“Most people accept that the Germans will have to get something,” says a senior monetary official. “At the heart of their problems is this: they cannot win this argument while at the same time saying they are not prepared to change the treaty.”

Waigel's stability pact aims to fill in the gaps in the Maastricht Treaty's. Once inside a currency union, member states would aim to keep their budgets close to balance in good times and, if a deficit arose, this would have to be kept below 3&percent; of gross domestic product. Failure to get a grip on this would lead - within a set period - to automatic sanctions including a fine of up to 0.25&percent; of GDP.

Since late last year, the Commission has been trying to incorporate these ideas into a treaty framework. While some of this can be done, imposing automatic sanctions would be contrary to the treaty.

But Waigel and Stark are still refusing to accept this conclusion, which was spelt out in a recent progress report from the monetary committee.

“They were disappointed because they wanted automaticity explicitly included,” said a senior Commission official. “They have accepted the text, but they went away determined to fight their corner again.”

Although reopening the economic chapters of the treaty is taboo to Bonn, chunks of the treaty call for further legislation to clarify rules and definitions. Article 104c, which sets out the rules of the annual excessive deficit procedure, allows for such secondary legislation.

In this way, all member states could agree to alter the terms of the excessive deficit protocol to the treaty.

Officials believe other member states could agree to use this method to establish a so-called 'early warning system' aimed at nipping budget deficits in the bud. The Commission has suggested that this could include more regular and transparent monitoring of policy and pooling of fiscal information with other member states.

However, agreeing sanctions under this treaty article looks less likely because the differences between member states are too wide. While the recent document approved by finance ministers referred to Waigel's idea of a massive fine based on GDP size, that was all it did. It did not advocate it or rule it out.

“The most powerful argument against it is the proportionality principle,” insisted a senior finance ministry official. “The punishment should fit the crime and most people agree that fines are inappropriate.”

Suspending payments from the EU budget would be an ineffective sanction against northern member states, while automatic tax increases would be impossible to agree.

It looks as though sanctions will have to wait. “If we come up with something which is acceptable to all countries, then it will say nothing,” says a member state negotiator.

Instead, the question of setting sanctions is more likely to be left until the short-list of countries ready and willing to join a monetary union is drawn up just under two years from now.