European Parliament president calls for deficit rules rethink

Martin Schulz, European Parliament president and socialist candidate for president of the European Commission, has called for a rethink of Europe's deficit rules, which he said were outdated.

Mr Schulz called on member states to show greater pragmatism on anti-cyclical state investment during economic downturns – welcome words to France as it battles a budgetary deficit in breach of the EU’s ceiling of 3 per cent of national output.

"The deficit criteria in the stability pact were laid down 22 years ago and have to adapt to the political reality," Mr Schulz told Germany's Handelsblatt business daily.

“It’s not on that the public purse drops out as an investor in crisis countries and that private companies cannot invest in these countries because of the credit crunch. We’ll never get growth this way.”

Two decades after Germany made its single-currency participation conditional on deficit rules, Mr Schulz called yesterday for greater differentiation in deficit calculations between “consumptive state spending and investment in the future of an economy”.

Keynesian flexibility
His call for greater Keynesian-style flexibility will generate resistance from the conservative challenger in the European election, Jean-Claude Juncker, the former euro group chief who helped draft the stability pact. Mr Schulz's remarks also fly in the face of additional fiscal compact demanded by German chancellor Angela Merkel two years ago as a condition for Berlin's involvement in euro crisis rescue measures.

The comments carry echoes of a decade ago when Germany and France were among 10 countries in breach of the EU’s deficit ceiling.

Faced with rising unemployment and negligible growth in 2004, then chancellor Gerhard Schröder’s government announced additional deficit spending plans to stimulate the economy. With Berlin’s deficit already at 4 per cent of GDP, Mr Schröder’s spokesman said the spending represented a “rebalancing of the emphasis” of the stability pact “to suit current economic circumstances”.

In September 2004, after pressure from Berlin and Paris, the European Commission presented watered-down deficit rules it dubbed a "credible compromise between economic soundness and political realism". A decade on, Paris and Berlin find themselves on opposite sides of the fiscal fence.

While Germany's economy is booming, ongoing weakness in the French economy saw the budgetary deficit hit 4.3 per cent last year. France's new socialist finance minister, Michel Sapin, is seeking an extension, the third, to reduce the French deficit below the 3 per cent ceiling.