Europe divided over budget deficit row

[Dreamer128]

It is being described as the biggest crisis yet to hit the European Union. The bloc's finance ministers have agreed to effectively suspend the union's budget rulebook to spare giants France and Germany from disciplinary action after they repeatedly exceeded their budget deficits. The move has infuriated Spain, the Netherlands, Finland and Austria. "The law is the same for everyone", said Spanish Prime Minister Jose Maria Aznar, "this is a step backwards. Today is not a good day for Europe or the European economy." Some small countries, who have themselves fought hard to to keep within the letter of the pact, have slammed the move.

Austria said it had lost a battle, but not the war, with possible reference to the new EU constitution, which is up for negotiation next month. Ironically, the Growth and Stability Pact, which sets out budget deficit limits for eurozone members, was hammered out at German insistence before the launch of the euro to protect the common currency.

German Chancellor Gerhard Schroeder, who called the compromise "reasonable", said "sometimes one has to put more emphasis on the growth side of the pact rather than its stability side, both in the national interest and the interests of Europe". The decision marks a stinging blow for the European Commission, which is threatening to take the case to the European Court of Justice.

[Source: Euronews.net]

[johnny]

Told you this is going nowhere. France and Germany don't give a crap about the rules, they do whatever they want to do. The EU is nothing but a bubble, and it's about to burst. Can't say i feel sorry about it either.

[Grojlach]

And for those who still got no idea whatsoever what this is all about, here's some more detailed information about the so called "stability pact":

Q&A: What is the European stability pact?

The stability and growth pact is a key part of the agreement that led to the establishment of the euro, the single currency that is now used by 12 European countries. But why is it becoming increasingly controversial?
What is the stability pact and why was it set up?
The stability and growth pact is an agreement to limit budget deficits in countries that are members of the eurozone, who have swapped their own currencies for the euro.
When the eurozone was set up, it meant that control of interest rates passed from national governments to the European Central Bank (ECB), whose mandate was to keep inflation under control.
But the architects of European Monetary Union - especially Germany - feared that some countries would get round the tough monetary policy of the ECB by increasing government spending and running large budget deficits.
So they insisted that countries agree to limit their budget deficits to no more than 3% of their total economy.

So who is in breach of the deficit rules now?

Ironically, it is now the biggest and most influential members of the eurozone - France and Germany - who are breaking the very rules they insisted on.
The recession in Germany and France has meant that the income received from taxes by their governments has declined, while their high unemployment has meant greater spending on benefits.
In order to help boost their economies, both governments have decided to cut taxes, defying the European Commission.
They both claim that they are aiming to reduce their budget deficits to below 3% - but not yet.
The smaller eurozone countries, like the Netherlands, who have introduced sharp budget cuts to keep their own deficits in line, are furious.

Who enforces the rules?

The rules of the stability pact are enforced by the European Commission.
Its directorate of economic and financial policy decides whether a country has breached the stability pact, and recommends measures to correct the problem.
If persistent breaches occur, it can recommend fines - which in theory can be a large proportion of government revenue - to the council of European finance ministers.
But in practice, it has been difficult if not impossible to get these elected politicians to agree on such large fines which would further damage that country's economy.
So effectively enforcement must rely on the public shaming of countries that breach the rules, and an acceptance that those rules make sense.

Should the stability and growth pact rules be relaxed anyway?

Many observers, including the UK Chancellor, Gordon Brown, argue that the stability pact is too rigid.
Countries should be allowed to run larger deficits if there is a major recession, and money borrowed for productive investment in infrastructure projects like roads and schools should also be allowed.
Fears about the effect of the stability pact rules on Sweden's welfare state was a key element in the decision by its electorate to reject membership of the euro.
But some economists say that the eurozone does need a rule to control fiscal irresponsibility - otherwise some countries could "free ride" and gain the benefits of membership in the euro currency zone without having to pay the costs.
And they argue that, given the difficulty of enforcing any rule without a functioning European-level government, a simple, rough-and-ready rule is better than none.

What is likely to happen?

In the short term, it is hard to see how France and Germany will avoid breaching the stability pact rules - especially if the economic slowdown continues.
In the longer term, there may be some modifications of the pact - something the European Commission has already foreshadowed.
Those changes might involve a different way of measuring the budget deficit, to take into account the economic cycle (i.e. a country being in recession).
But in order to enforce such changes, there would need to be more cooperation among eurozone governments about their fiscal policies - something that could prove politically controversial.
Some fear the end result would be harmonisation of tax rates across Europe, potentially damaging the competitiveness of individual member states' economies.

Source: BBC

[ 11-29-2003, 03:16 PM: Message edited by: Grojlach ]