EU heavyweights pull theirweight again at summit

23rd March 2005, Comments 0 comments

23 March 2005, BRUSSELS - They call themselves the European Union motor and at the bloc's summit on Wednesday, heavyweights France and Germany were clearly back in the driver's seat.

23 March 2005

BRUSSELS - They call themselves the European Union motor and at the bloc's summit on Wednesday, heavyweights France and Germany were clearly back in the driver's seat.

Sweeping aside predictions that eastward expansion of the European Union would dilute their influence, Berlin and Paris pushed through their economic agenda at the two-day Brussels meeting.

Their first coup: watering-down the eurozone's already battered stability pact to accomodate ballooning budget deficits.

France and Germany have overshot the pact's once-sacred rule that national deficits not exceed 3 percent of GDP. Both have done so not once but every year since 2002 - and are likely to do so again in 2005.

French President Jacques Chirac and German Chancellor Gerhard Schroeder thus had a special interest in forcing through revision of the eurozone fiscal rule book to gain more leeway to spend their way out of economic slowdown.

"There is more flexibility," said Schroeder.

Reaction to the move was mixed.

Rainer Guntermann, senior European economist for Dresdener Kleinwort Wasserstein in Frankfurt said it might help keep European Central Bank (ECB) interest rates higher.

"It adds an element of uncertainty for the ECB," he said.

But John Palmer of the European Policy Centre in Brussels, said the revised pact went back to the original EU concept that growth and economic conditions have to be taken into account when judging budget discipline.

The second Schroeder-Chirac victory: winning a radical rewrite of a blueprint to deregulate the EU's key services sector which accounts for 70 percent of the bloc's economy.

"It is indispensable to clear the table and start from scratch ... this (services) text is unacceptable," declared Chirac.

Schroeder added: "It must be fundamentally changed."

President Chirac came to the summit under intense pressure after two opinion polls this week showed a surprise majority for 'no' votes in a  29 May referendum in France on the planned EU constitution.

French workers and the government fear that opening up EU services - currently regulated by national laws in member states - would lead to a flood of cheap labour from new EU states where labour costs are far lower than in the west.

With German unemployment a record 12.6 percent, Schroeder, was also in no mood to see more eastern European workers in Germany. The Chancellor therefore joined Chirac to rage against 'social dumping' and demand a far more limited deregulation of services.

The re-emergence of the Franco-German power duo in EU policy- making comes after last year's historic expansion bringing in 10 new members had led many to speculate that the old Berlin-Paris axis would become history in a new era of shifting alliances.

For a time both countries kept a lower profile. But the economic challenges posed by new EU members who have recently shed communism and are fervent believers in market economies and deregulation have prompted Chirac and Schroeder to fight back.

After months of castigating the new members for their radical tax cuts, the Chancellor last week responded to the eastern challenge by abruptly pledging to trim German corporate taxes to 19 percent from the present 25 percent.

Chirac, meanwhile, is using the EU stage to reassure French voters he is fighting to preserve France's high levels of worker protection and high wages.

Expect more from the Franco-German alliance.

Both countries are joining forces for the mother of all EU battles coming up in June: who pays what and who gets what from the bloc's 2007 to 2013 spending plan.

Schroeder vowed that Berlin would not increase its contribution to EU coffers over 1 percent of GDP. Germany is the bloc's biggest paymaster and already contributes over 20 percent of the total EU budget which is about EUR 100 billion a year.

Chirac was equally adamant that countries being asked to observe fiscal austerity at home could not be hit up for more funding for Europe.

EU budget fights are always bitter and the last one at a 1999 summit in Berlin dragged on for 28 hours. The upcoming battle royale promises to be no less fierce and Chirac said he doubted a deal would even be sealed in June.


Subject: German news

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