EU stability proposal would allow more deficit breaches

The European Commission has approved a proposal to make the Stability and Growth Pact more flexible but to increase pressure on euro-zone governments to create budget surpluses during periods of economic growth, writes Denis Staunton, European Correspondent

The Economic and Monetary Affairs Commissioner, Mr Joaquin Almunia, characterised the proposals as "evolution rather than reform" and stressed that the budget deficit ceiling of 3 per cent of GDP would not change.

"While some of the suggestions in the communication may eventually lead to legislative changes, most of them would not affect the pact regulations. This is a political process in which we have to work together with the member states' governments in order to improve our economies for now and for the future," he said.

The commission's call for legislative changes could put it in conflict with the European Central Bank (ECB) which insisted this week that there should be no change to the wording of the regulations governing the pact.

Under the commission's plan, which will be discussed by EU finance ministers at a meeting in The Hague next week, countries that breach the budget deficit limit could avoid sanctions if they are affected by "protracted slowdowns". At present, only severe recessions are considered to constitute the "exceptional circumstances" under which the excessive deficit procedure can be waived.

The commission also wants to give offending countries more time to bring their budget deficits under control if a rapid tightening of the public purse strings would damage economic growth.

"The principle remains that an excessive deficit should be corrected promptly. But a clear distinction should be made between the budgetary adjustment effort required from a country in excessive deficit and the eventual deficit outcome that is inevitably influenced from factors outside the control of each government," Mr Almunia said.

While the budget rules would become more flexible, governments would come under greater pressure to reduce public debt and to improve their budgetary positions during periods of economic growth.

Mr Almunia wants to use the EU's broad economic policy guidelines to co-ordinate economic reform throughout the euro zone and to exert peer pressure on governments to cut public debt.

"It is of no use to set ambitious objectives in our economic policy if we cannot afford to pay for the necessary investment that is needed for their achievement. And at the same time we cannot run budgetary policies with the sole objective of stability without creating the necessary room for growth policies," he said.