European Commission Defends Stability Pact

The European Court of Justice in Luxembourg on Wednesday began deliberating in the legal dispute between the European Commission and EU member states over accusations that finance ministers had no legal basis to suspend disciplinary action last year against Germany and France for violating the terms of the Stability and Growth Pact.

The court case "is not about economics, it's about the legal interpretation of the treaty," said Commission spokesman Gerassimos Thomas.

Last November the EU executive called for levying stiff financial punishment after Germany and France -- the euro zone's two biggest budget sinners -- recorded a deficit in excess of the stability pact's three-percent limit of gross domestic product (GDP) for the third year running. Finance ministers from the member states, however, opposed the Commission and voted against slapping Berlin and Paris with penalties. Instead the two violators got off with pledges to rein in their deficits by 2005.

The Economic and Monetary Affairs Commissioner at the time, Pedro Solbes, accused the member states of breaking EU law by suspending disciplinary action and filed a lawsuit against them under a special fast-track process. A verdict is expected within six months.

EU Commission vs. member states

The unprecedented court case triggered a rift between the EU executive and member states last year and pitted smaller countries, who maintain tight budgetary discipline, against larger repeat offenders such as Germany and France. The case also serves to lay out exactly what powers the Commission has to enforce recommendations.

Analysts say a loss for the Commission, ostensibly the guardian of EU treaties, would likely erode its already weak enforcement power.

Member states "have to approve all sanctions," Daniel Gros, director of the Center for European Policy Studies, told the Associated Press. "The Commission can only recommend them."

Brussels issues new warnings

Amidst the start of the court case, the Economic and Monetary Affairs Commission issued its latest round of recommendations. Britain and the Netherlands, who exceeded the three-percent limit in 2003, were let off the hook because the Commission was convinced both were already coming back into line. Portugal, which was the first country to face disciplinary action in 2002, was given a clean slate for managing to rein in its deficit for two years in a row.

The Commission criticized Italy for "significant slippage" in its projected 2004 deficit. Rather than achieving the target 2.2 percent of GDP, Rome was seen as moving closer to 3.2 percent. It recommended that the council of EU finance ministers issue Italy an "early warning."

"Budgetary plans were recurrently based on overoptimistic growth assumptions," the new Economic and Monetary Affairs Commissioner, Joaquin Almunia, said in remarks on Wednesday, adding that Rome's problem was "almost entirely structural" and not due to outside factors.

Italian Prime Minister Silvio Berlusconi has brushed off criticism from Brussels in the past and was not ruffled by the latest statements. Early in the month Deputy Premier Gianfranco Fini told the Italian news agency ANSA the government was "unconcerned" by the warning because "it is certain that sanctions would not be accepted" by EU finance ministers.

Last year, when Germany and France were faced with penalties, Italy joined them in calling for changes in the rule book and voted in favor of suspending disciplinary action.

Almunia, who entered office this month, follows his predecessor Solbes' hardline stance against such Stability Pact violators. Although he endorses some reform of the rules to better reflect economic growth and public debt, he is against removing the three-percent limit, arguing that it is a cornerstone of EU economic policy.

"Our single currency, the euro, is young and we have to ensure that our policies are transparent and predictable" he said.