ECB boss seeks Commission role on pact

The power given to European Union leaders to enforce the rules of the EU budgetary deficits pact is like letting a potential alcoholic loose on a minibar, the European Central Bank's vice-president has said.

Speaking in Munich, Mr Lucas Papademos said the weakest part of the Stability and Growth Pact under which deficits must not exceed 3 per cent of gross domestic product is the arrangements for enforcing it.

The final judges on whether a country breaking the rules should face sanctions are EU leaders, who are both subject to the rules and are able to change them, he said in prepared remarks at the Munich Economic Summit.

"In other words, the situation is similar to that of a potential alcoholic who has been given the key to the minibar," he said.

Mr Papademos said it would be valuable to enhance the role of the European Commission in enforcing the pact and to create more peer pressure within the EU Council for countries to comply with its rules.

He said the rules on fiscal discipline provide enough flexibility for countries to weather economic downturns and no changes are needed.

"It is essential that greater flexibility and pragmatism in the implementation of the Stability and Growth Pact must not lead to the relaxation of the rules, thereby undermining the pact's credibility," he said.

The pact, which requires governments to keep their public deficits below 3 per cent of Gross Domestic Product or face penalties, is an asset to the macroeconomic policy framework and has greatly contributed to EU fiscal discipline, Mr Papademos said.

He made no comment on monetary policy or current economic conditions in his remarks.

Some politicians have criticised the pact as placing a straitjacket on governments, robbing them of the ability to provide a fiscal stimulus during economic downturns.

Germany for one is struggling to get its budget deficit, which topped 3.6 per cent last year, back below the 3.0 per cent limit by 2004, and France faces violating the pact limits.

But the ECB has consistently said the pact provides the needed discipline to tame budget deficits and this in the medium term enhances growth prospects and price stability.

The Commission could act as a non-partisan assessor of the fiscal situation of EU member states and implement penalties, he said. - (Reuters)