Europe’s stability pact: Stabbed

Date: 11/10/03

A slow, lingering death

THIS is not the end of the European Union's “stability and growth pact”, but it is probably the beginning of the end. Under the rules, the governments of the 12 countries in the European single currency, the euro, are obliged not to run budget deficits bigger than 3% of GDP. If they breach the limit for three years running, and cannot plead the extenuating circumstances of a severe recession, the pact provides that they should be fined billions of euros.

France's stated intention to run a deficit of more than 3% in 2004, the third year in succession, has now forced matters to a crisis. In theory, if the legal procedures are followed, the remaining euro members could vote through financial sanctions as early as next January. In practice, this is most unlikely. The supposedly iron fetters of the stability pact are turning out to be made of something rather more flexible, like jelly.

This being the EU, the procedure is complicated. Last June the European Commission noted that France was on course to breach the 3% ceiling in 2004 and issued recommendations to bring matters under control. On October 8th the commission declared that France had failed to follow its June advice, so it would now move to the next stage in the “excessive deficit procedure”. This involves binding recommendations that would then be put to EU governments for approval, probably on November 4th. If the French take no action on these recommendations within two months, fellow governments are supposed to consider imposing financial sanctions early next year.

But the commission is likely to suggest only recommendations that France can accept, in order to avoid a confrontation. It will shy away from insisting that Francis Mer, the French finance minister, take genuine measures to get the deficit below 3% next year. Instead it will accept his promises to restore budgetary discipline by 2005, in exchange for further token cuts in spending next year.

Smaller countries may be upset by such leniency. The Portuguese were censured under the stability pact, and others have made strenuous efforts to comply with it - so why should Mr Mer be allowed to cock a snook at the rules? A Dutch spokesman in Brussels says his government believes that the commission is legally obliged to recommend measures to bring France below 3% in 2004; if the commission fails in its duty, the Dutch government would consider taking the commission to court “as a last resort”. Yet at a meeting this week, most European finance ministers leant in the opposite direction - they would not approve sanctions, even if the commission were to propose them.

So is this the death of the stability pact? Thus far, the commission has played things by the book. But if its recommendations prove as feeble as seems likely, that would be a big slide away from the rules. The pact might then evolve into a rough guide to action, rather than the precise legal instrument its framers had sought. However, there is one way in which this scenario, allowing the pact to die a slow but relatively dignified death, might come unstuck. Mr Mer's prediction that he will bring the deficit below 3% of GDP in 2005 looks doubtful. And commission officials insist that if France breaks the rules for four years in a row, sanctions really will become a serious prospect. Really.

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