Juncker ‘needs a miracle’ to steer stability pact from road to perdition

Date: 03/03/05

Europe's governments are waiting with bated breath to learn whether or not Juncker can conjure up a miracle. He hopes to have the details wrapped up at meetings of the eurogroup, the twelve finance ministers of the single currency zone, on Monday (March 7) and the full Ecofin Council of the EU's twenty-five finance ministers the next day.

In the meantime, behind closed doors, he is working on the project with his top aide, Günter Grosche, a German who was formerly a senior official at the International Monetary Fund. Grosche recently retired as secretary of the Council of Minister's secretive Economic and Financial Committee, the body of representatives from EU member states that prepares meetings of Ecofin. Juncker and Grosche are putting the finishing touches to a compromise paper on the reform, which they are praying will be accepted, if not welcomed, by all parties to the negotiations.

At stake is certainly the credibility of Juncker, the man who, on 1 January, became the first person to start a full two-year term in the job of chairman of the eurogroup, prospectively a second "Mr Euro" alongside European Central Bank (ECB) president Jean-Claude Trichet.

More importantly, now that Juncker has set a timetable, failure to resolve the fraught Stability and Growth Pact debate would expose the decision-making of the enlarged European Union to ridicule. It could also lead to this contentious issue dominating the spring Economic Summit on March 22-23, instead of the Lisbon Agenda and economic reform. If history is any guide, that would be a disaster, and one with potentially explosive repercussions.

Reform of the pact pits big eurozone countries against small, members of the single currency against the non-members, who are effectively being excluded from the real decision-making, and old members of the Union against new.

Just how highly charged the debate has become was underlined last week. Jürgen Stark, vice-president of Germany's Bundesbank, came to Brussels to deliver a public broadside against the reform proposals.

In so doing he took a stance which, while aligned with the views of the ECB, directly challenged the position which Germany's own Chancellor Gerhard Schröder has taken.

"Economic logic militates against reform of the pact," he told his audience.

Reform would harm all member states in the long term and "ultimately undermine public faith in the promise made by European governments to safeguard the stability of the single currency with permanently sound public finances," he said.

The credibility of the old Stability and Growth Pact, memorably but ignorantly immortalised by then Commission president Romano Prodi as "stupid", finally fell apart on 25 November 2003 when the Ecofin Council decided to "put in abeyance for the time being", the excessive deficit procedure for France and Germany. This effectively demonstrated what Stability and Growth Pact critics had long argued, namely that big countries could flout the rules and would never allow themselves to be subjected to the sanctions that the pact prescribed for recidivists.

In September last year Joaquín Almunia, the European commissioner for economic and monetary affairs, produced a communication on how to reform the pact, which set in train a round of haggling.

On the one side are the leaders of countries like France and Germany who have failed to get their deficits under control and who, under the catch-all concept of more "flexibility", are trying to get special concessions written into the pact's allegedly inflexible rules. The list is long. Among the many items touted as being worthy of special treatment under the Maastricht Treaty's 3% budget deficit restriction are defence spending, research and development outlays, and, for Germany, re-unification costs and net contributions to the EU budget. Some ideas, it seems, are still on the table.

On the other side are a group of small countries, including the Netherlands, Austria and Finland, some of whom have already taken their medicine and got their budget deficits under control. They are backed by central banks led by the most outspoken, the Bundesbank, and the most concerned, the ECB.

Some changes are now inevitable but the critics of reform fear that if every country can, in effect, claim a country-specific exclusion from the pan-EU rules, Europe will soon find itself back on the road to budgetary perdition.

These opponents of reform may be proved right in the longer term. But in the short term the rhetoric favouring a more "intelligent" and economically "literate" pact is hard to counter.

The fact that if Germany, France and Italy were to start running up massive budget deficits again this might eventually induce the ECB to set interest rates slightly higher is not something which is going to bother politicians today.

Several eastern European countries who want to join the single currency are justifiably more concerned.

The ECB could, in effect, veto their membership of the euro club if new rules were to encourage their political leaders to veer (further) towards fiscal indiscipline.

So fingers will be crossed in the chancelleries of Europe next week. The potential for a serious and damaging bust-up at the summit cannot be ruled out. But expect special meetings of the eurogroup and the Ecofin Council before then if things go badly.

What is at stake from a reform of the Stability and Growth Pact?

Observers of the reform process, even quite senior monetary and treasury officials, are in the dark about the details of what Juncker will propose.

Given this informational black hole, the best and most digestible analysis of the issues has come from the International Monetary Fund (IMF), written by Michael Deppler, director of the IMF's European department, and two associates.

Deppler assumes, no doubt correctly, that the 3% deficit limit and the 60% debt limit enshrined in the Maastricht Treaty will remain and then argues that the detailed regulations of the pact itself are actually sufficiently flexible. "We see no compelling case for rewriting the regulations that call for close to balance or in surplus (CBS) fiscal targets over the medium term; the present legal text offers sufficient flexibility to accommodate country-specific concerns," he writes.

The biggest change that he recommends is for national parliaments to play a bigger role in formally debating national stability programmes. Some academics go further and suggest that national governments should, like Australia, set up official, independent budget audit bodies. The Netherlands and Belgium also have independent monitoring bodies, he points out.

Otherwise Deppler "sees no case for change for Economic and Monetary Union's fiscal framework". It was not the "stupidity" of the pact or the vagaries of the economic cycle, but the irresponsibility of the politicians, he implies, which brought the era of budgetary consolidation to an end in several leading EU states.

• Stewart Fleming is a Brussels-based freelance journalist

Major analysis feature on the prospects for a compromise on the reform of the Stability and Growth Pact. The issue is due to be discussed at the meeting of the Eurogroup on 7 March 2005 and the Ecofin Council on the following day.

• Primary Source