Wed, 09 Mar 2005

From: AFP

No agreement on reforming Stability and Growth Pact

Agence France-Presse, Brussels

Eurozone finance ministers have failed to reach agreement on reforming their much-maligned Stability and Growth Pact, which sets limits on public deficits, after a marathon debate wrapped up with only a promise to meet again.

France and Germany have lobbied hard to get more flexibility into the stability pact, raising the ire of smaller countries such as Austria and The Netherlands, which have been pushing for the principles of fiscal discipline to be upheld.

At a Franco-German summit in Germany, French President Jacques Chirac said on Monday that the pact must have a "political" dimension and not be enforced without flexibility.

The key tenet of the stability pact says 12 eurozone members must keep public deficits below three percent of output, a limit France and Germany have exceeded for several years.

The economic battle will be rejoined on March 20, just ahead of a March 22-23 summit at which the EU heads of state hope to approve the agreed changes.

Luxembourg Prime Minister Jean-Claude Juncker, whose country currently occupies the EU's rotating presidency, said the eurozone nations would meet first on March 20, followed by a discussion by all 25 EU member nations on the same day.

Juncker hopes those meetings will make the necessary progress; "We are heading towards agreement," he said.

For his part, German Finance Minister Hans Eichel proclaimed himself "optimistic" on the chance of agreement at the next meeting.

His French counterpart Thierry Breton called Monday's marathon meeting "good".

The Luxembourg proposals addressed many of the French and German concerns, suggesting, in particular, that mitigating circumstances should be taken into account before launching excessive deficit procedures.

Such circumstances could include German reunification costs, spending on research and development, pension reforms, defense spending, and, unexpectedly, the impact of the rise of the euro.

The proposals also suggest that countries in breach of the deficit limit should have an extra year to comply with the three percent limit, if their economic growth is less than one percent over three years.

The Luxembourg presidency proposed that countries making important reforms or that used times of economic growth to fortify their budgets would enjoy more leeway when their fiscal situation got worse.

German Chancellor Gerhard Schroeder was to meet late on Tuesday with Juncker to present France and Germany's joint position on reforming the stability pact.

Such lobbying by the two countries goes down badly with smaller countries that have been fighting hard to get strict and clear guidelines for budgetary discipline enshrined in the reforms to the stability pact.

Austrian Finance Minister Karl-Heinz Grasser, who has led the camp in favor of fiscal discipline, also voiced a skeptical note ahead of the meeting.

"I think there's been progress, but much of it in the wrong direction," he said.

International credit rating agency Standard and Poor's warned Monday that a weakening of the stability pact's rules could damage the debt ratings of some eurozone countries.