| Author (Person) | Davies, Eric | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Series Title | In Focus | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series Details | 8.12.03 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Publication Date | 08/12/2003 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Content Type | News, Overview, Topic Guide | In Focus | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At its meeting on 25 November 2003, the European Union's Economic and Financial Affairs Council decided not to implement sanctions against France and Germany for breaking the terms of the Stability and Growth Pact by running excessive budget deficits. The Council's action attracted widespread criticism and raised doubts not only about the future of the Pact, but also about the way in which the Union is governed. Background The Stability and Growth Pact is intended to regulate the economies of the Member States by, amongst other things, limiting government budget deficits to a maximum 3% of national economic output. It has its legal basis in the Resolution of the European Council on the Stability and Growth Pact, adopted in June 1997, and in two Regulations: Regulation 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies and Regulation 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure. It is, however, Article 104(1) of the Treaty establishing the European Community which states that 'Member States shall avoid excessive government deficits.' The Treaty also sets out the sanctions regime intended to be applied to Member States breaking the Pact, with Article 104(11) identifying four measures which the Council can apply or intensify:
The Pact has become a contentious issue, with the 3% ceiling being called into question a number of times. The most notable criticism was arguably that made in October 2002, when Commission President Romano Prodi said the Pact was too rigid and called it 'stupid'. Following the failure of France to comply with the maximum 3% deficit, President Chirac, speaking in July 2003, called for 'a more political interpretation' of the Pact's rules, 'to allow eurozone governments greater freedom of manoeuvre.' Other Member States have taken steps to ensure that they remain within the parameters set by the Stability and Growth Pact, and there has been considerable unease, notably amongst Austria, Finland, and The Netherlands, at the prospect of France and Germany- or, indeed, any Member State - escaping sanctions. The latest developments were precipitated by the recognition that both France and Germany are running excessive deficits, which triggered actions on the part of the Commission and the Council according to the process set out in the Treaty. On 3 June 2003, the Council formally recognised that an excessive deficit exists in France. The Council adopted a recommendation under Article 104(7) of the Treaty, intended to resolve the situation by recommending that France end its excessive deficit by 2004. France was given a deadline of 3 October to initiate appropriate measures. On 8 October, the European Commission issued its assessment of the situation. It identified five measures taken by France:
However, it did not accept that they were sufficient to tackle the deficit, and - as required by Article 104 - therefore recommended that the Council should act against France (see Commission press release). A meeting of the Economic and Financial Affairs Council on 4 November postponed discussion of the Commission Recommendation for action against France, deciding instead to address the issue on 25 November. On 18 November the Commission found that Germany had failed to comply with a Council recommendation of 21 January 2003, which set a deadline of 21 May for Germany to take appropriate measures to end its excessive deficit. The Commission therefore recommended that the Council should require Germany to end its excessive deficit situation by no later than 2005. The Commission also proposed additional measures, including allocating 'any higher-than-expected revenue to deficit reduction' (further details can be seen in the Commission's press release). Following the Commission's 18 November meeting, Commissioner Pedro Solbes said that the Commission 'stood firmly by the principle that we are a Community of law and that the Treaty and the Stability and Growth Pact have to be applied together. They are our only guarantee for the well functioning of our Union and the sensible governance of our currency, the euro.' Discussion of the situation in both countries was scheduled for the 25 November meeting of the Economic and Financial Affairs Council. Prior to the meeting, the Financial Times forecast that the Commission would not win a fight 'between the eurozone's two most powerful economies and Brussels' (see Brussels decision sets up showdown on German deficit). That view was borne out once the details of discussions were made public. Under the heading 'Implementation of the Stability and Growth Pact', the official report of the Council meeting on 25 November showed that, because there was insufficient support for the Commission's recommendations for the Council to adopt Decisions under Article 104(9), the Council decided not to follow the process set out in the Treaty. Rather than apply the sanctions available to it, the Council opted instead to suggest a number of measures which each of the two Member States should take to tackle the problem, and to ask them to 'put an end to the present excessive deficit situation as rapidly as possible and at the latest by 2005.' Despite failing to follow the legal procedure, and acting instead on the basis of intergovernmental co-operation, the meeting concluded that the Council: confirms its strong commitment to sound public finances as a basis for strong economic growth and increased employment; reaffirms its commitment to the Stability and Growth Pact as the framework for the coordination of budgetary policies in the European Union; and reaffirms the determination to implement the provisions of the Stability and Growth Pact by ensuring equality of treatment across Member States and the role of the Commission in this area. However, the Commission had a statement inserted into the minutes, saying: 'The Commission takes note of the rejection by the Council of the Commission recommendation under Article 104(8) for France and Germany, without giving the adequate explanation as laid down in the European Council Resolution on the Stability and Growth Pact. The Commission therefore considers that the Council recommendations based on Article 104(7) remain in force.' The Commission's regret at the Council's decision was further demonstrated in a press release issued the day after the Council meeting, in which it argued that 'the Council cannot resort to ad-hoc measures to suspend or amend the Pact every time it deems that its provisions are too stringent or inopportune. We cannot have rules à la carte. We all have to play by the rules of the Treaty and the Pact.' President Romano Prodi also confirmed that 'the Commission will continue to apply the Treaty and the Pact rules because it is our duty to do so', saying that this approach 'is the best guarantee that all Member States will be treated equally.' The Council's decision did not meet with the approval of the European Central Bank, which said in a statement that the Council's conclusions 'carry serious dangers. The failure to go along with the rules and procedures foreseen in the Stability and Growth Pact risks undermining the credibility of the institutional framework and the confidence in sound public finances of Member States across the euro area.' The BBC reported Commissioner Solbes' view that the Council had effectively undermined the Growth and Stability Pact: 'The problem is that we have a political decision (by the finance ministers) which had no legal basis ... I am completely disappointed.' It also noted that the Commission might take legal action to enforce the Pact. The view of the Financial Times was that the Council's decision to suspend sanctions was taken 'to protect Germany and France from the humiliation of taking economic instructions from Brussels' (see 25.11.03: EU sanctions deal leaves euro pact in tatters) The FT quoted the German chancellor, Gerhard Schröder, who called the decision 'a sensible compromise between the imperatives of budget consolidation and support for the signs of economic growth'. Although the German government was pleased at the outcome, the country's former Finance Minister, Theo Waigel, said he was 'outraged, that Germany, which was responsible with other countries for getting the pact through, should disregard it in this way.' Herr Waigel went on to say that France and Germany failed to meet their deficit targets in the belief that they thought they could get away with it (see FT article 'Pact-busters pilloried in tide of recrimination') Markets seemed largely unaffected by the Council's action, with the FT suggesting that 'Many economists believe the pact was always a paper tiger: an unenforceable set of rules designed to protect against a non-existent threat. Indeed, for France and Germany to have accepted the European Commission's demands for more spending cuts or tax increases, at a time when their economies are just picking themselves off the floor, would have been worse for Europe than yesterday's falling-out.' (See A note of caution was, however, sounded by a spokesman for the Bank of America, who warned that 'Not playing by the rules cannot be a good thing for the European economy in the long run'. This view of Europe's 'big two' abusing their power was shared by other commentators, some of whom suggested that such an attitude would make negotiations on the Union's draft Constitution even more difficult than they promised to be. Speaking to the European Parliament on 3 December, Commissioner Solbes said:
Further information within European Sources Online European Sources Online: In Focus
European Sources Online: European Voice
European Sources Online: Financial Times
Further information can be seen in these external links: EU Institutions Council of the European Union
European Commission DG Press and Communication
DG Economic and Financial Affairs
European Central Bank
Media organisations BBC News Online
Eric Davies Background and reporting on the week's main stories in the European Union and the wider Europe. |
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| Subject Categories | Economic and Financial Affairs | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Countries / Regions | France, Germany | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
