Eurozone split after Solbes move to save Stability Pact

Date: 26/09/02

By Peter Chapman, Business Editor

THE eurozone was split down the middle last night after the European Commission's surprise proposal to give France, Italy, Germany and Portugal more time to balance their books.

In a move timed to perfection after the German election and on the eve of French and Italian budgets, the Commission said tough economic conditions warrant the delay - which will give Italy until 2005 to balance its budget and the other three until 2006.

Pedro Solbes, the commissioner for economic and monetary affairs, was hailed in Paris, Rome, Berlin and Lisbon. But he provoked fury from countries already forced to take the strong economic medicine.

The Netherlands vowed to lead opposition in the eurogroup after finance ministers from Belgium, Spain, Austria and Greece said Solbes had called into question the credibility of the EU's Stability and Growth Pact.

Stephen Schrover, spokesman for Dutch Finance Minister Hans Hoogervorst, said: 'The Commission needs a large majority to make those changes. We are against,

Spain and Belgium will not support the Commission, and there are signs that Finland and Austria will also oppose the changes.'

However, the Commission's senior economist, finance director-general Klaus Regling, insisted the executive did not need approval from eurogroup ministers. 'I can't see any need for any formal adoption of anything,' he said.

But he conceded that the Commission 'would feel more comfortable' if a majority of eurogroup countries backed its approach.

Regling attacked those who claimed the proposal represented a weakening of budgetary discipline.

He said countries would still have to keep their borrowing below 3 of national income - and to make sure, they would also have to cut their 'structural deficits' by 0.5 every year.

This measure adjusts for economic swings and ensures governments would not be able to hide excessive spending or tax cuts behind extra revenues from a temporary upturn.

Regling said the main change was that the Commission was reinterpreting the requirement that member states' budgets are close to balance in the 'medium term' by extending the target deadline.

'The key rules of the pact are not affected. The only point we are discussing is what is the 'medium term'.' He said 'it would have been unwise' to insist on the 2004 deadline agreed three months ago at Seville because it would have harmed growth prospects.

There was a mixed reaction from MEPs on the Parliament's influential economic and monetary affairs committee, charged with scrutinising EU financial policy.

German Christian Democrat Karl von Wogau said the move 'would weaken the euro currency in the long run'. But Dutch Socialist Ieke van den Burg responded: 'I believe the decision is realistic in the present situation.'

European businesses claimed the move was a sell-out to Germany and France. Philippe de Buck, secretary-general of employers' federation UNICE, said: 'It seems to me to be obvious that the Commission caved in.' He said putting more emphasis on 'structural' deficits would inevitably lead to weaker finances.

'I am a Belgian. In the 1970s and 1980s governments here came up with differences between 'nominal' and 'structural'. We ended up with the top levels of deficits in the EU.'

The eurozone has been split down the middle following the European Commission's surprise proposal to give France, Italy, Germany and Portugal more time to balance their books. The Commission said tough economic conditions warrant the delay, which will give Italy until 2005 to balance its budget and the other three until 2006.