Euro crisis looms as France, Germany stitch budget deal

25th November 2003, Comments 0 comments

BRUSSELS, Nov 25 (AFP) - The 12-nation eurozone was plunged into crisis Tuesday after EU finance ministers let France and Germany off the hook for repeatedly breaking the area's strict budget rules.

BRUSSELS, Nov 25 (AFP) - The 12-nation eurozone was plunged into crisis Tuesday after EU finance ministers let France and Germany off the hook for repeatedly breaking the area's strict budget rules.

The decision struck at all-night talks left the EU's Stability and Growth Pact in tatters. The European Commission refused to rule out legal action and the European Central Bank (ECB) went into emergency talks.

The accord, endorsed by ministers from all 15 EU nations, suspended "for the time being" disciplinary measures against Paris and Berlin for failing to get their budget deficits under 3.0 percent of gross domestic product (GDP).

The deal was pushed through in the teeth of opposition from EU Economic and Monetary Affairs Commissioner Pedro Solbes, whose normal geniality deserted him as he struggled to contain his anger.

And a clutch of member states that have worked hard to remedy their own finances -- Austria, the Netherlands, Finland and Spain - voted against."The pact is not dead but it's in the refrigerator," Dutch Finance Minister Gerrit Zalm said.

The eurozone's two-biggest economies are on course to breach the 3.0 percent ceiling for three years running next year.

But critics such as Solbes say their financial problems are as much down to their past profligacy as to the current economic downturn.

Solbes had pushed for the EU to launch the next step of an "excessive deficit procedure" against the "big two" that could have ultimately led to multi-billion-euro fines.

But in a deal struck in overnight talks among the euro countries, rubber-stamped by all 15 EU countries, ministers agreed to put the procedure "in abeyance for the time being".

They called on the pair to get their deficits under 3.0 percent by 2005 but diluted the Commission's recommendations on the pace at which the deficits must come down, giving the countries a few billion more euros to play with.

Solbes said the deal, by suspending legally enshrined deficit procedures, made a mockery of the 1997 stability pact -- which ironically was insisted on by Germany to enforce discipline on the rest of the euro countries.

In a statement he said the Commission "deeply regrets that the euro group has not followed the spirit and the rules of the treaty and the Stability and Growth Pact".

The ministers' decision "disregards the legal rules enshringed in the treaty and the pact", it said, and warned that Brussels would "decide on possible subsequent actions" in response to the move.

That was an implicit threat to take the issue to the European Court of Justice, the EU's highest court.

ECB governors held an emergency teleconference, with the euro bank having warned repeatedly that failure to respect the stability pact could fuel inflationary pressure -- with inevitable fall-out on interest rates.

One source said the Frankfurt-based bank's governing council would seek to arrive at "a common position" that was "as close as possible" to that of the European Commission.

But British Chancellor of the Exchequer Gordon Brown, a sceptic on the merits of euro membership, said the accord showed the increasing recognition of the need for a more flexible interpretation of the pact.

"We believe that it is the right way forward to examine how the (pact) works over a cycle, takes into account investment needs of different countries and takes into account the sustainability of the debt position," he said.

And the euro itself shrugged off the row, trading at 1.1777 dollars in early European trading against 1.1767 late on Monday in New York.

But traders warned that over the longer term, the common currency would suffer if EU institutions are at each other's throats.

"While the financial markets have anticipated the demise of the stability pact for some time, the likely rifts this would cause between the European states could yet be construed as a negative for the euro," said Bhanu Baweja, currency strategist at UBS in London.


Subject: French news

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