Brussels Set to Propose Changes to Stability Pact

EU Economic and Monetary Affairs Commissioner Joaquin Almunia will unveil the proposals on Friday, before EU finance ministers discuss them later next week with a view to rewriting the Stability and Growth Pact next year.

Almunia has said he wants to introduce more flexibility into the pact, which limits member states budget deficit to 3 percent of the Gross Domestic Product (GDP). His proposals would give finance ministers more room to manoeuvre during periods of sluggish economic growth or downturns.

A straight jacket

Critics of the Stability Pact describe it as a straight jacket, and argue that reforms are necessary to give nations such as Germany, a country struggling with soaring unemployment and stagnant growth, enough room to finally revive their ailing economies.

Almunia's proposals foresee exactly the sort of flexibility that Germany and France -- the euro zone's two largest economies -- have been demanding. Despite legal battles with Brussels and complaints from smaller, more economically disciplined euro zone countries, Berlin and Paris have breached the deficit limit for two consecutive years and would clearly benefit from the new plan.

On Tuesday, Germany estimated its 2004 budget deficit at 3.7 percent of GDP -- clearly above the pact's ceiling -- but pledged to meet the criteria in 2005. Roughly half of the 12 euro zone states are over the limit on public deficits this year.

Softening the rules

Although Almunia plans to retain the current deficit ceiling, he is expected to loosen the rules when it comes to deciding what to do with countries that breach the pact. He is also considering allowing EU states a grace period during years of slow growth.

At the moment, an euro zone states are permitted a budget deficit exceeding 3 percent only in the event of a severe recession. In the future, the European Commission will also bear in mind a country's total debt load when assessing the condition of its public finances.

According to the new reforms, the deadlines imposed on a country to reduce its debt are also likely to be relaxed and tailored to the individual country.

A license to go deeper in debt?

Ironically, it was Germany who insisted on introducing the pact when the euro was launched. Out of fear of run-away spending and deficit, Berlin pushed for the pact as a means to ensure a stable currency.

Although the proposals will be welcomed by Berlin and Paris, others fear that a relaxing of the Stability Pact will be taken by some countries as a green light to go deeper and deeper into debt.