EU spending freeze faces opposition

Attempts by net-contributing EU states to make the case for a freeze in the EU's spending in the post-2000 budget are likely to face strong opposition from Cohesion countries like Ireland when EU Finance Ministers (Ecofin) meet here today.

The Minister for Finance, Mr McCreevy, is expected to warn that such cuts will prevent the Union fulfilling legal obligations and key political objectives such as cohesion.

Ministers are also likely to be presented with the outline of new proposals emerging from the EU's socialist finance ministers for a strategy to shift the European economic emphasis from fears of inflation to concerns about deflation and jobs. The socialist ministers, with non-governmental colleagues like Labour's Mr Derek McDowell TD, were meeting last night in Brussels at their now traditional caucus ahead of Ecofin to finalise agreement on a paper entitled "The New European Way".

Although reflecting strongly a conventional desire to see a continuation of the fiscal disciplines that have laid the basis for monetary union, the paper emphasises the need for a "dialogue" between monetary, social, income and environmental policies - seen by some as code for a political counterweight to the European Central Bank (ECB) and a signal to the ECB of the need for further cuts in interest rates.

The socialists were also expected to hear from the new German Finance Minister, Mr Oskar Lafontaine, and his French counterpart, Mr Dominique Strauss-Kahn, about their ideas for specific infrastructure measures to boost economic growth which may go to the Vienna summit next month.

Freezing the EU budget, or at least curbing its rise to below the level suggested by the Commission, is increasingly being seen here as the way to resolve the bitter dispute between net-contributor and net-recipient states over Agenda 2000.

Alternative approaches recently circulated by the Commission, either in the form of a rebalancing of the contributions system or renationalisation of part of Common Agricultural Policy payments, are being viewed as too radical to be agreed unanimously by the member states.

A freeze, or "stabilisation", of the budget would at least, the argument goes, provide net contributors with a political get-out domestically in the claim that they had succeeded in reducing their "unfair" share of the burden. France and Germany are understood to favour the option, supported by net contributors the UK, Sweden, Austria and the Netherlands, while Ireland and the three other Cohesion countries - Portugal, Spain and Greece - are set to oppose vigorously what they see as an attack on structural and farm funding. Others are insisting that any discussion of expenditure levels should only come after a discussion of policy priorities.

Commission estimates of the effect of the freeze suggest that it might have to cut structural funding in the next budget round by as much as £12 billion and staffing by some 2 per cent.

Mr McCreevy may also raise, on the fringes of the meeting, what the Irish regard as an unacceptable paper from the Commission on compensating regions for the loss of duty-free sales when they are abolished for intra-EU travel next June.

The paper, which has been bitterly attacked by the duty-free lobby and Munster's MEP Mr John Cushnahan, merely points to funding already available under current programmes and to measures that governments may themselves take without suggesting the need for extra new resources.

Meanwhile, the president of the Commission, Mr Jacques Santer, has called for caution in considering recent proposals for global foreign exchange bands.

Mr Lafontaine has argued for currency bands, suggesting that excessive fluctuations damage the economy.

Mr Santer told an international economics conference in Berlin over the weekend that he sympathised with the desire to limit excessive fluctuations, but he insisted that solid fiscal and economic policies were the best solution.

He also urged adherence to the original terms of the Stability and Growth Pact which limits EMU participants to annual budget deficits equivalent to 3 per cent of their GDP.

"Everybody who has read the Stability and Growth Pact knows it is flexible enough to take our current economic situation into account," he said. "It isn't there only for sunny weather."

One of his commissioners, Mr Mario Monti, has recently been arguing the case for a re-interpretation of the conditions of the Stability Pact that would allow governments to increase capital spending without breaching the terms of the agreement.