Europe's revamped fiscal rules have failed to force governments to start balancing their books, leaving public finances exposed, it will be claimed today.
Joaquin Almunia, EU monetary affairs commissioner, will say finance ministries have not kept their promises under the new-look stability and growth pact to use the good times to put their finances in order.
One year after the pact was controversially rewritten, Mr Almunia will argue that the loosened fiscal code has worked better than expected in bringing the worst budgetary offenders such as Germany and France into line.
But he will say that the revised pact has so far failed in a second key objective: forcing countries with moderate deficits to use the recovery to restore their budgets to balance.
In a report to be published today, Mr Almunia will say: "On average, the structural balance for the EU [ in 2006] will not improve and for some member states will even deteriorate, turning the fiscal stance expansionary and pro-cyclical."
Mr Almunia and Jean-Claude Trichet, European Central Bank president, fear that a failure to consolidate finances now could leave them in a very fragile state if Europe is hit by a downturn.
They argue that balanced budgets are needed to prepare Europe for the costs of an ageing population and to pay for economic reforms.
When they rewrote the discredited stability pact in March 2005, finance ministers stressed that the new rules would have an important "preventive" role in pressuring governments to bring down borrowing during upswings.
Mr Almunia's report confirms that no such thing has happened, in spite of growth of above 2 per cent forecast for 2006. The average deficit in the euro zone is projected to be 2.4 per cent this year - the same as in 2005 - in spite of surging government receipts.
The new pact requires countries with deficits to make structural cuts of 0.5 per cent a year to bring budgets close to balance.
But Mr Almunia notes that budget plans by member states "suggest that the current recovery is so far not being used to accelerate fiscal consolidation and place public debt on a declining path". - (Financial Times service)
