Anger as large euro economies get budget leeway

Anger erupted across Europe yesterday over plans to allow France, Germany and Italy an extra two years to balance their budgets, in one of the most serious disputes since the introduction of the euro.

Some smaller EU countries, which have already taken painful measures to eliminate their deficits, are upset over proposals to give the euro's three biggest economies until 2006 to do the same.

They claimed the European Commission plan showed there was one rule for the big countries and another for the rest, and that it damaged the budgetary discipline underpinning the euro.

Markets have so far reacted calmly but many believe the euro could be damaged if respect for the budgetary rules in the Stability and Growth Pact breaks down.

Yesterday, France published its budget for 2003, with tax-cutting plans that clearly break its commitment to achieve a balanced budget in 2004. Italy's budget next Monday is also expected to signal a postponement in the target date for scrapping its deficit.

Although both countries are suffering from sluggish growth, many EU members believe Paris and Rome are flouting the stability pact by pushing through election pledges to cut taxes.

The Netherlands, Austria and Spain were among those criticising the Commission's plan to delay until 2006 their target dates for balanced budgets.

Dutch finance minister Mr Hans Hoogervorst said there was a danger that the closing date for balancing budgets would become "a moving target", subject to further change at the whim of larger member-states.

Austrian finance minister Mr Karl-Heinz Grasser said: "A two-class system. . . would not be acceptable."

Spain said the decision should not have been made before consultation with member-states. The issue is likely to lead to a heated discussion at the meeting of EU finance ministers on October 8th.

The danger, recognised privately by the Commission, is that the leeway given to the biggest EU economies could result in other countries concluding that it is all right to relax fiscal discipline. The result could be that the European Central Bank is forced to raise interest rates.

The markets believe a relaxation of the target date for cutting deficits would allow some governments to reflate their economies.

It is understood that Commission President Mr Romano Prodi personally ordered the retreat to 2006, fearing that it would be impossible to defend the 2004 date in the face of intense pressure from the bigger EU economies. - (Financial Times Service)