Stability Pact Negotiations Enter Vital Week

The EU is bracing for crunch talks on reforming the bloc's tattered fiscal rules on Sunday, hoping to resolve stubborn rifts ahead of a summit next week already clouded by questions of wider economic strategy.

The European Union (EU)'s Luxembourg presidency has taken the unusual step of convening a meeting of finance ministers on a weekend, to try to strike a compromise before the bloc's traditional spring economic summit next Tuesday.

Luxembourg Prime Minister Jean-Claude Juncker has sought to downplay the sense of crisis over reforms to the Stability and Growth Pact, the rule book underpinning Europe's single currency. "If we don't reach an agreement on Sunday it will not be a catastrophe. It will not prevent us finding an accord at the summit," he said earlier in the week.

But few are under any illusion that Juncker -- who is also his country's finance minister -- would like to reach agreement on the pact on Sunday's meeting, which diplomats warn could extend into a traditional EU marathon.

A history of calamities

The 1997 budget pact was all but suspended in November 2003 when EU heavyweights France and Germany were left off the hook despite repeatedly breaching a key requirement of the rule book. The pact notably stipulates that members of the 12-nation euro zone must not run public deficits in excess of three percent of GDP.

Since then nearly half the EU's 25 states have also triggered disciplinary measures under the pact, while the system's already-strained credibility has also suffered after it emerged that Greece had submitted wrong data for years.

Now the EU -- still struggling to emerge from a prolonged economic slowdown -- is determined to renew the budget rules in a way that will not threaten recovery.

Key to the amendments is the so-called "excessive deficit procedure," triggered when a country's accounts run too far into the red, allowing a series of warnings and ultimately the threat of huge fines.

Germany calls for delays in action

EU heavyweights led by Germany in particular insist that the procedure should not be initiated automatically when deficit slips above three percent of GDP but should take into account a range of other factors.

Sunday's extraordinary pre-summit finance ministers' meeting was called after regular talks earlier this month failed to find a breakthrough. At that meeting the EU presidency notably proposed a list of special circumstances, under which countries would be allowed to breach the three percent of GDP ceiling.

But that was rejected notably by new EU member states, which have pushed through painful reforms to meet the budget rules only to see the old EU heavyweights flout them repeatedly.

Juncker to present new plan

Ahead of this weekend's talks Juncker is expected to present another compromise proposal. EU sources say that, instead of a list of specific circumstances, the new plan will set out in broader terms situations when more flexibility would be allowed.

"Since we can't agree on the definition of this list we are thinking of doing away with it," he told the French daily Le Figaro this week. "We are talking about replacing the list with more general terms," he said.

It remains unclear whether a deal can be struck Sunday, or whether the thorny issue will have to be handed over to EU leaders next week. Their menu is already packed, including notably how to re-launch the EU's so-called Lisbon Agenda drive for growth, hammer out an accord to free up Europe's vast services sector, not to mention a looming row over long-term budget plans.

Juncker will be happy if he can strike a fiscal pact deal by the end of the weekend.