Time has come for stability pact overhaul, declare policy pundits

By Simon Coss

Date: 18/12/03

THE Stability and Growth Pact may have lost pretty much all credibility since eurozone finance ministers refused last month to sanction France and Germany for blatantly ignoring it, but that's no reason for scrapping EU budgetary rules, argue many of Europe's leading think-tanks.

Instead, say the policy analysts, the pact needs to be taken to bits and rebuilt from scratch - and this time governments should do the job properly.

Read any of the numerous discussion papers or articles that have been written on the demise of the pact and one message comes across again and again. The eurozone needs some sort of rulebook to ensure individual countries don't rock the collective single currency boat with irresponsible budgetary policies.

"The rationale for having common fiscal rules is as valid today as in 1997, when the pact was drawn up," argues Katinka Barysch, chief economist at the London-based Centre For European Reform (CER), in a recent in-depth paper entitled A Pact for Stability and Growth.

"If countries share a common currency, they should not and cannot be indifferent to each others fiscal policies. Profligate public spending in one eurozone country could push up inflation and force the European Central Bank to keep interest rates higher than they would otherwise be," she adds.

But having argued strongly in favour of keeping some budgetary discipline rules, Barysch is scathing about the pact in its current form.

"As it stands, the Stability and Growth Pact ensures neither stability nor growth," she said bluntly, adding that in her opinion the Union's fiscal rulebook has "lost all credibility".

The CER analyst favours a new pact that would allow eurozone governments with low public debts to borrow money, and not just for investment.

Such comments are likely to go down well with many of the smaller eurozone countries who are seething after seeing Paris and Berlin let off from obeying the tough EU budgetary rules they all had to respect.

Barysch also says that governments who fail to rein in large deficits during periods of strong economic growth - as was the case with France in 1999 and 2000 - should face immediate sanctions. The current pact only "starts to bite when growth slows and budget deficits hit the 3% ceiling", she adds.

John Palmer, political director of the Brussels-based European Policy Centre, agrees that the eurozone needs a revised stability pact. The recent Ecofin Council debacle left the pact "severely wounded" and is also likely to "undermine the credibility of the important leadership role France and Germany continue to play in driving forward the wider process of European integration", he said.

But despite this gloomy analysis, he insists that "the stability pact is not dead". Palmer is even charitable enough to suggest that the pact has had a modest amount of success.

"Neither Berlin nor Paris would have taken the difficult - if limited - measures they have already adopted to tackle their excessive deficits without the existence of the pact and its disciplinary rules," he suggests.

Like Barysch, Palmer says any reformed pact should have more power to force countries to introduce budgetary reforms when the economic going is good.

"Far less traumatic measures would have been necessary now, if more determined action had been taken in Paris and Berlin a few years ago to cut deficits," he says.

Daniel Gros, of the Centre for European Policy Studies, another Brussels-based think-tank, also believes the eurozone's budget deficit rules need rewriting.

But he insists that any effective reforms would involve rather more than redrafting the wording of the stability pact.

Only a fundamental revision of the EU's founding treaties will allow the eurozone to adopt truly modified budget rules, he insists. Such a move would have to be approved unanimously by EU governments at an intergovernmental conference (IGC).

And as the current palaver over the planned EU constitution has shown only too well, IGCs are anything but simple affairs.

• Simon Coss is a freelance journalist basedin Rennes, France.

Many of Europe's leading think-tanks argue that the Stability and Growth Pact needs to be taken apart and rebuilt from scratch, but some sort of rulebook is required to ensure individual countries do not have irresponsible budgetary policies.

http://www.epc.eu/ http://www.epc.eu/

CER: Policy Brief, October 2003: A pact for stability and growth http://www.cer.org.uk/pdf/policybrief_stabilityandgrowth_oct03.pdf

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