Solbes bid to reward prudent states

Date: 28/11/02

By Peter Chapman

THE European Commission unveiled plans this week to give countries with healthy finances more slack for spending on projects intended to boost long-term growth and development.

But Romano Prodi, the Commission president and Pedro Solbes, economic and monetary affairs commissioner, warned that the privilege would not apply to member states which have allowed their accumulated national debts to spiral above 60% of national income.

The plan signals a change in the way the Commission intends to carry out its duties as EU 'budget policeman' but not in the underlying rules of the Stability and Growth Pact, which Prodi recently branded as 'stupid' because of its rigidity.

'In the last weeks I have expressed my views so clearly, it is not necessary to repeat my concerns,' said the Commission chief at a joint press conference with Solbes.

'Four years after the launch of the euro we must learn from our experience and implement the Stability and Growth Pact in a more intelligent way,' Prodi added.

In a bid to refocus on member states' long-term debt, Prodi and Solbes pledged to address a problem that weakens economies by forcing countries to divert tax income or borrow to service massive interest payments.

They said the Commission would, in future, take the same tough stance against indebted countries as it had against Germany, France and Portugal for breaking the stability pact's 3% budget deficit ceiling.

So far the Commission has shied away from punishing countries, such as Italy, Greece and Belgium, whose debts are all hovering around 100% of national income or more.

Solbes said he might launch excessive debt warnings, which could ultimately lead to fines against persistent offenders. But he added that the Commission was more interested in persuading countries to commit to ambitious debt-cutting measures.

Sanctions - which must be approved by the Council of Ministers - would only follow if member states subsequently failed to tackle the problem.

Under the proposals, which the Commission hopes will be approved by finance ministers early next year, Solbes also pledged to react more rapidly if countries loosen their budgets in boom times.

But, crucially, he said member states with 'sound public finances' below the 60% mark 'could be allowed to deviate' from a key requirement in the Stability and Growth Pact - saying that member states should be close to balance - 'provided always that at no time the 3% limit is endangered'.

In such cases, spending should be to 'help ensure the implementation of the Lisbon strategy' - the EU's reform blueprint aimed at becoming the world's most competitive economy by 2010.

Solbes said action that would be tolerated included tax reform or a long-term public investment programme 'whether in physical infrastructure or in human capital'.

Such a policy brings the Commission closely in line with the UK - where Chancellor Gordon Brown has won admirers for his so-called 'golden rule' that allows him to raise government spending on projects that will boost his country's crumbling infrastructure and ultimately lead to higher growth rates.

Brown this week announced that government borrowing would have to rise to pay for an ambitious spending programme.

However, UK debt levels are still far below the EU's 60% cut-off point.

The European Commission has unveiled plans to give countries with healthy finances more slack for spending on projects intended to boost long-term growth and development.